Cross-Border Valuation Question 1 There are two ways to compute the projects NPV. The first approach is to calculate it in Mexican Pesos and then change the resulting figure into Euros at the spot rate of MXN15.99/EUR. Note that the discount rate that we have used was the yield on the long-term peso-denominated corporate bonds. Below is the screenshot showing how we have done this. Computing NPV in Mexican Pesos (resulting NPV in Euros is 138‚902) Question 2 The second approach is to transfer each
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a firm’s future Should we build this plant? All rights reserved - Christopher B. Alt 2 Key Steps in Capital Budgeting Estimate CFs (inflows & outflows) Assess riskiness of CFs Determine the appropriate cost of capital Find NPV and/or IRR Accept if NPV > 0 and/or IRR > WACC All rights reserved - Christopher B. Alt 3 Independent vs. Mutually Exclusive Projects Independent projects: if the cash flows of one are unaffected by the acceptance of the other Mutually exclusive projects:
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CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concept Questions 1. In this context‚ an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today‚ not‚ for example‚ what it cost to acquire. 2. a. Yes‚ the reduction in the sales of the company’s other products‚ referred to as erosion‚ should be treated as an incremental cash flow. These lost sales are included because
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NPVs are easy to determine using a calculator with an NPV function. NPVL = $18.78 and NPVS = $19.98. Answer 2: The rationale behind the NPV method is straightforward: if a project has NPV = $0‚ then the project generates exactly enough cash flows to recover the cost of the investment and to enable investors to earn their required rates of return (the opportunity cost of capital). If NPV = $0‚ then in a financial (but not an accounting) sense‚ the project breaks even. If the NPV is positive
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---------------------------------------- PART B: NPV &IRR LATHE A NPV & IRR LATHE B NPV & IRR years cash flow PV Factor @13% PV cash flows PV Factor @13% PV 0 (660‚000) 1 (660‚000) (360‚000) 1 (360‚000) 1 128‚000 0.885 113‚274 88‚000 0.885 77‚876 2 182‚000 0.783 142‚533 120‚000 0.783 93‚978 3 166‚000 0.693 115‚046 96‚000 0.693 66‚533 4 168‚000 0.613 103‚038 86‚000 0.613 52‚745 5 450‚000 0.543 244‚242 207‚000 0.543 112‚351 NPVA 58‚133 NPVB 43‚483 IRRA 16% IRRB 17% ACCEPTABILTY OF EACH PROJECT: Under the NPV calculations both
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capital budgeting tools a firm can use in analyzing a capital expenditure. They are: net present value (NPV)‚ internal rate of return (IRR)‚ profitability index (PI)‚ payback period (PB)‚ discounted payback period (DRP)‚ and modified internal rate of return (MIRR). This case study will focus mainly on NPV and IRR‚ in addition to the remaining four capital budgeting tools. Net Present Value (NPV) The NPV of an investment proposal for a project is the same as the” present value of its annual free cash
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flow | -150.0 | 36.0 | 48.0 | A. For this base-case scenario‚ what is the NPV of the plant to manufacture lightweight trucks? B. Based on input from the marketing department‚ Bauer is uncertain about its revenue forecast. In particular‚ management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the PV of the project if revenues are 10% higher than forecast? What is the NPV is revenues are 10% lower than forecast? C. Rather than assuming that cash
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Edition‚ Pearson Education Limited. Glen Arnold‚ (2007) Essentials of cooperate finance management‚ Pearson Education BNET Investopedia‚ URL: http://www.investopedia.com/terms/a/arr.acp‚ Accessed on (06/11/2008) Pike‚ R Stephen Keef‚ Melvin Roush‚ NPV and IRR discounted cash flow methods are widely used‚ but they can create conflicting signals‚ 1995‚ pg 2. David Brookfield‚ 1995‚ Management Decision‚ Vol 33‚ No 8‚ Pg 2. Leslie Chadwick‚ 2007‚ management accounting‚ 2nd edition‚ elements of business
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equal‚ a project’s NPV increases as the cost of capital declines. c. All else equal‚ a project’s MIRR is unaffected by changes in the cost of capital. d. Statements a and b are correct. e. Statements b and c are correct. Ranking conflicts 2. Answer: a Diff: E Which of the following statements is most correct? a. The NPV method assumes that cash flows will be reinvested at the cost of capital‚ while the IRR method assumes reinvestment at the IRR. b. The NPV method assumes that
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Report on Capital Budgeting Abstract This report deals with • The nature of capital investment appraisal • The techniques available for evaluating capital investments • The limitations of these techniques • The capital budgeting practices in select countries Introduction: Some of the major responsibilities of top management are in the area of long range planning. Allocating resources to competing uses is one of the most important decisions a manager has to make. Executives are constantly
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