FINANCIAL MANAGEMENT: CAPITAL BUDGETING MINI CASE 1 CAPITAL BUDGETING (MINI CASE) QUESTION A What is capital budgeting? Solution: Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore‚ a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this‚ a sound procedure to evaluate
Premium Net present value Internal rate of return
into an equity joint venture in the city of Changchun.This proposal would be one of the first two green field equity joint venture with PepsiCo having control over both the board and day-today managmenet. PepsiCo uses capital budgeting tools such as NPV and IRR to systematically evaluate their investment project. Using this evaluation method Mr Hawaux‚ vice president of Finance for PepsiCo East Asia‚ was wondering whether this project would be profitable and if PepsiCo should proceed with the Changchun
Premium Net present value Internal rate of return People's Republic of China
accepted? (C) What are the criticisms of the payback period? (D) Determine the NPV for each of these projects? Should they be accepted – explain why? (E) Describe the logic behind the NPV approach. (F) What would happen to the NPV if: (1) The cost of capital increased? (2) The cost of capital decreased?
Premium Net present value
Integrated Case 11-24 Allied Components Company Basics of Capital Budgeting You recently went to work for Allied Components Company‚ a supplier of auto repair parts used in the after-market with products from Daimler‚ Chrysler‚ Ford‚ and other automakers. Your boss‚ the chief financial officer (CFO)‚ has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this
Premium Net present value Internal rate of return
Computation of the NPV : NPV= -35‚000 + Σ 5‚000 / ( 1 + 12%)^ 15 i=1 NPV = $- 945. 67 Computation of the IRR : 0= -35‚000 + Σ 5‚000 / ( 1 + IRR)^ 15 i=12 IRR= 11.49% The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%) Rainbow products shouldn’t go for it. (B) Based on the perpetuity formula we can compute the PV in this case : Computation of the PV : PV= Cash flow per year/ cost of capital) =4‚500 / 0.12 = $37‚500 Computation of the NPV : NPV= -Initial investment
Premium Net present value Cash flow
NPV A Item Years "Amt of Cash Flow" "20% FACTOR" "PV of Cash Flows" Annual Cost Savings 1 - 7 80000 3.605 288400 Initial Investment NOW -300000 1 -300000 Salvage Value 7 20000 0.279 5580 Net Present Value -6020 NPV B Item Years "Amt of Cash Flow" "20% FACTOR" "PV of Cash Flows" Annual Cost Savings 1 - 7 60000 3.605 216300 Initial Investment NOW -300000 1 -300000 Working Capital Released 7 300000 0.279 83700 Net Present Value 0 NPV A
Premium Net present value Investment
The comparison of NPV & Other investment rules Comparison of NPV & Other Investment Rules Capital budgeting is important for a company to make decisions on investments and financing issues. However‚ there are various methods can be used for corporate financing‚ among which Net Present Value (NPV) is the best rule which can always lead to the correct choices. Except NPV‚ the company can also use payback period‚ discounted payback period method‚ the internal rate of return (IRR) and the profitability
Premium Net present value
techniques: net present value (NPV)‚ internal rate of return (IRR)‚ modified IRR (MIRR)‚ profitability index (PI)‚ payback and discounted payback. Each approach provides a different piece of information‚ so it is better to look at all of them when evaluating projects. Each one of them has it’s own strengths and weaknesses‚ which may help us to understand each project return liquidity and risk. Financial Theory: Six capital budgeting decision criteria are used in this case: NPV‚ IRR‚ MIRR‚ PI‚ payback
Premium Net present value Capital budgeting Internal rate of return
Chapter 13 Real Options and Other Topics in Capital Budgeting Learning Objectives After reading this chapter‚ the student should be able to: ◆ Explain why conventional NPV analysis may not capture a project’s impact on the firm’s opportunities. ◆ Identify five different types of real options. ◆ Explain what an abandonment/shutdown option is‚ give an example of a project that includes this type of option‚ and explain what an option value is. ◆ Explain what a decision
Premium Net present value
CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash
Premium Depreciation Weighted average cost of capital Corporate finance