35‚300 2 46‚200 3 50‚000 4 22‚620 5 15‚100 6 5‚200 7 11‚740 8 89‚300 a) Calculate the Net Present Value (NPV) of the project. Should the firm accept or reject the project based on the NPV criteria? b) Calculate the Internal Rate of Return (IRR) of the project. Should the firm accept or reject the project based on the IRR criteria? c) Calculate the Profitability Index (PI) of the project. Should the firm accept or reject the project based on the PI criteria
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11 - 1 11 - 2 Choosing the Optimal Capital Budget Finance theory says to accept all positive NPV projects. Two problems can occur when there is not enough internally generated cash to fund all positive NPV projects: Increasing Marginal Cost of Capital Externally raised capital can have large flotation costs‚ which increase the cost of capital. Investors often perceive large capital budgets as being risky‚ which drives up the cost of capital. (More...) An increasing marginal
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Target Corporation Patrick Cunningham M03619570 Professor John Phelps‚ Ph.D. February 6‚ 2014 Executive Summary: This case study analyzed five different projects Target Corporation had to decide on capital spent for which project created the most value and the most growth for the company and its shareholders. By analyzing the financial statements and exhibits of each project‚ I was able to determine the positives and negatives of each of these alternatives. The alternatives were Gopher
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Case Study #1: Green Valley Medical 1-Green Valley Medical Center is a nonprofit teaching hospital affiliated with a large state university and had grown since its foundation in the 1930s with continuous support from state revenues. Since it is a nonprofit organization its main goal is not to create profit for the investors‚ but to reach their institutional goals‚ which in this case is to offer good service for the region it is located in and to train the students that attend to the state university
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analyzed using several key financial indicators. Based on the results of the analysis a recommendation will be made as to whether or not the project should be accepted. The key results of the analysis are listed below: Financial Indicators NPV $7‚795‚695 IRR 12.822397% Payback Period 8.175779 Discounted Payback Period 14.275897 Profitability Index 1.388673 Discount Rate 8.891528% The results of the analysis lend favourably towards accepting the investment project. First it is important
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that the required rate of return is 15% and the initial cost of the machine is $3‚000‚000. 1. What is the project’s IRR? (10 pts) Answer: Irr=iL+[(iU-iL)(npvL)]/[npvL-npvU] Irr=0.19+[(0.24-0.19)(193484.61)]/[193484.61-86216.77] Irr=0.19+[(0.05)(193484.61)]/[279701.38] Irr=0.19+9674.2305/279701.38 Irr=0.19+0.0346 Irr=0.22446 or 22.46% 2. What is the project’s NPV? (15 pts) Answer: 1‚100‚000/(1+0.15)^1=1‚100‚000/1.15=$956‚521.74 1‚450‚000/(1+0.15)^2=1‚450‚000/1.3225=$1‚096‚408.32
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the investment projects‚ we can use 5 main methods‚ NPV‚ IRR‚ MIRR‚ payback and discount payback. Each method has different advantage to evaluate the investment projects. It is better to use NPV and MIRR methods to evaluate the projects. NPV can provide basic accurate methods to use time value of money to estimate investments. MIRR includes both WACC and reinvestment rate; therefore‚ it is more accurate to evaluate the investments. 3. First‚ NPV is the most common and useful method. It provides a
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000 3 18‚000 19‚000 4 16‚000 14‚000 5 19‚000 15‚000 6 14‚000 13‚000 Evaluate the above proposals according to: 1. Pay Back Period. 2. Accounting Rate of Return (ARR) 3. Net present value method (NPV) Proposal A is better than B‚ because ARR and NPV are higher than Proposal B 2. There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80‚000 and Proposal B costs $ 100‚000. The discount rate is 10%. The cash flows before depreciation
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To: Michael Campbell‚ General Manager‚ Phuket Beach Hotel From: Albert‚ Andy‚ Becca‚ Chris‚ & Derek Consulting Date: June 14‚ 2011 Re: Valuation of Potential Karaoke Pub Projects Thank you for retaining AaBCD Consulting in the valuation of your future capital improvement project. There are two mutually exclusive capital improvement projects under consideration: lease under-utilized space to an unrelated third party‚ Planet Karaoke Pub‚ or invest greater capital to open and manage your own
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Bethesda Mining Company 02/24/2011 Introduction Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio‚ Pennsylvania‚ West Virginia‚ and Kentucky. Recently the coal mining industry has been impacted by environmental regulations that have presented challenges for the industry. However‚ a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda is considering operating a new strip
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