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
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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
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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
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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
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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
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present value In finance‚ the net present value (NPV) or net present worth (NPW) of a time series of cash flows‚ both incoming and outgoing‚ is defined as the sum of the present values (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price‚ the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF)
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with different 5-year projections of cash flows. The evaluation done to the two corporations (A and B) is based on the Net Present Value (NPV) and the Internal Rate of Return (IRR). The net present value represents the value the project or investment adds to the investor wealth. The NPV method of capital budgeting suggests that all projects that have positive NPV should be accepted because they would add value to the investment. On the other hand‚ the internal rate of return is defined as the discount
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because it payback period is less than the 4 year maximum payback period 3.65years < 4 years ---------------------------------------- PART B: NPV &IRR LATHE A NPV & IRR years 0 1 2 3 4 5 cash flow (660‚000) 128‚000 182‚000 166‚000 168‚000 450‚000 cash flows (360‚000) 88‚000 120‚000 96‚000 86‚000 207‚000 LATHE B NPV & IRR PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV (660‚000) 113‚274 142
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CAPITAL BUDGETING Cost of Capital Evaluating Cash Flows Payback‚ discounted payback NPV IRR‚ MIRR The Cost of Capital • Cost of Capital Components – Debt – Common Equity • WACC Should we focus on historical (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make decisions which involve raising and investing new capital. So‚ we should focus on marginal costs. What types of long-term capital do organizations use? nLong-term debt nEquity Weighted
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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 tree is and provide an example of
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