2013 Table of Content ABSTRACT 3 INTRODUCTION 4 Importance of Investment Appraisal for Business Entities 5 Calculations of NPV‚ IRR and Payback Period 5 Selection of Projects 8 Changes in the NPV with cost of capital 8 Changes in the IRR with cost of capital 9 Difference of sensitivity between Long-term and Short term NPV 9 NPV versus IRR 9 Conclusion 10 References 11 ABSTRACT This paper covers the implementation of three investment appraisal methods. Initially‚ importance
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Capital budgeting is the process of evaluating a company’s potential investments and deciding which ones to accept. A company’s market value added (MVA) is the sum of all its projects’ net present values (NPVs). Basically‚ one can calculate the free cash flows (FCFs) for a project in much the same way as for a firm. When a project’s free cash flows are discounted at the appropriate risk-adjusted rate‚ the result is the project’s value. One difference between valuing a firm and a project is the
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to evaluate a potential investment. There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are 1) Net present value: NPV is a discounted cash flow technique‚ which is the difference between an investment’s market value and its cost. NPV = Present value of cash inflow- Present value of cash outflow The investment should be accepted if the net present value is positive and rejected if it is negative. 2) Profitability
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the NPV approach to investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches. (30 marks) This first section of this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal‚ those of internal rate of return (IRR) and pay-back. Theoretical rationale for the NPV approach
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LONDON SCHOOL OF COMMERCE. | ASSIGNMENT ON ACCOUNTING AND DECISION MAKING TECHNIQUES | | QUINCY | 4/20/2011 | (A) Why is investment appraisal process so important? Answer Capital investment involves the commitment of large amounts of company resources‚ which will necessitate careful evaluation to be undertaken before a decision is reached. The investment appraisal process helps managers make the right investment decisions as regards what projects to invest in to maximize shareholders
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Assume that the economy is in a mild recession‚ and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L ’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However‚ you believe that the economy is about to recover‚ and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased
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Capital Budgeting Rules: NPV‚ IRR‚ Payback‚ Discounted Payback‚ AAR Categories of Plans 1. Replacement Projects: decisions to replace old equipment – those are among the easier of capital budgeting techniques. It is important to decide whether to replace the equipment when it wears out or to invest in repairing the machine. 2. Expansion Projects: These are decisions whether to increase the size of business or not – they are more uncertain than replacement projects. 3. New products and services: These
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11.04.2010 Chapter 10. Mini Case Situation You have just graduated from the MBA program of a large university‚ and one of your favorite courses was "Today ’s Entrepreneurs." In fact‚ you enjoyed it so much you have decided you want to "be your own boss." While you were in the master ’s program‚ your grandfather died and left you $1 million to do with as you please. You are not an inventor‚ and you do not have a trade skill that you can market; however
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now. On the other hand‚ if the project being takes this year suffers from lose: firm might unable to take the second project one year from now. NPV method: There are few methods‚ which can be used to evaluate the iPhone project. Net present value method is one of the most prevailing methods to calculate and evaluate the project’s cash flow. The NPV of a project is the sum of the present values of all cash flow being generated under the condition of firm
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A) Why is the investment appraisal process so important? Capital Investment Appraisal is of fundamental importance because: 1. Large Amount of Company Resources: Involvement of large amount of company resources and efforts which will necessitate careful evaluation to be undertaken before a decision is reached. 2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The
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