to do with retention but with the NPV of the extra funds (either retained or raised): if NPV is zero‚ dividend irrelevance applies. Yet‚ the dichotomy retention/no-retention is useful‚ because if agency problems are present‚ managers tend to retain funds and invest them in negative-NPV projects‚ and therefore the zero-NPV assumption must be removed‚ so that dividend irrelevance does not apply any more. Keywords. Dividend policy‚ irrelevance‚ retention‚ zero-NPV‚ epistemology‚ modelling‚ agency theory
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Washington State University Finance 325 Practice Problems 1. What is the net present value of a project with the following cash flows and a required return of 12 percent? Year 0 1 2 3 Cash Flow -$28‚900 $12‚450 $19‚630 $ 2‚750 2. What is the net present value of a project that has an initial cash outflow of $12‚670 and the following cash inflows? The required return is 11.5 percent. Year 1 2 3 4 Cash Inflows $4‚375 $ 0 $8‚750 $4‚100 3. A project will produce cash inflows of $1‚750
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Case 20: PEPSICO CHANGCHUN JOINT VENTURE Capital Expenditure Analysis Study Questions Q1. Use the information in the case to construct two sets of NPV and IRR analysis from joint venture view and Pepsico. Based on the results‚ what would be your decision on the proposed Changchun joint venture? Q2. Comment on the financial projections that PepsiCo used in its capital budgeting exercise‚ especially the NOPBT Cap‚ foreign exchange rate projection and the discount rate. Q3. What differences might
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determining which Corporation would be the better buy we will look at the Net Present Value (year 1 through 5) of both Corporations‚ determine the Internal Rate of Return‚ and conduct an analysis of the information gathered. Net Present Value (NPV) Net Present Value (NPV) is the sum of income and outgoing cash flows based on the present value of the same entity. If the net present value of the investment is positive an investment should be made otherwise‚ if net present value is negative an investment should
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firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects‚ even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time. Using the NPV to determine which projects to undertake leads to greater risk over time because best case scenario you can estimate the NPV in advance but the actual value of the project
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This case provides insight into how capital budgeting decisions are made and the factors that influence the decision making process of large corporations. Specifically‚ the case centers on the capital expenditure meeting for the Target Corporation‚ which is one of the top ten retailers in the United States. All corporations have some version of this meeting. The goal of the meeting is to determine what capital expenditure projects the company will undertake in the future to promote growth. Below
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to invest in determinant projects. The process by which the firm decides which investment is most profitable is called capital budgeting. There are different methods by which a firm can find the economic valuation for a project: net present value (NPV)‚ internal rate of return (IRR) and profitability index (PI). Even though the firm has different evaluation methods to help it decide which project to choose‚ the decision is not always very clear. For instance‚ the future cash flows provided by the
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still be a negative. The problem is what should Scott’s Miracle-Gro do. We did a NPV analysis focusing on the 4 Cost drivers for the Temecula plants which are raw materials‚ labor costs‚ electricity costs‚ and overhead costs and compared them to what it would cost in China. The NPV for the Temecula plant is $94‚826‚678 (screenshot of spreadsheet in appendix). The NPV for China mainland (offshore NPV would be close to mainland China except for initial start-up costs‚ etc..) is $90‚070‚804
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2013 Team Members: 2013 Team Members: 1. Executive Summary A report with results of geological tests in the south of Argentina determined that the area explored seemed to be rich in oil. A cost-benefit analysis needed to be done to make an investment decision for production facilities to extract oil from the ground. Evaluating investment opportunities in emerging markets is a mix of art and science. Unlike CAPM for developed markets‚ there is no standard pricing model for
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Evaluate the proposal In order to evaluate the aircraft proposal we need to calculate the NPV and IRR of both the Aircraft purchasing and leasing option. Investment decisions determine the future cash flows of a company and expected future cash flows determine the value of a company. In order to calculate the NPV we first needed to get a cost of capital. We calculated the Weighted Average Cost of Capital in order to measure the firm’s cost of capital. When calculating the WACC for the Aircraft
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