Adjusted Present Value Normal NPV calculation: NPV = −investment + CFN CF1 CF2 + +L+ 2 (1 + WACC) (1 + WACC) (1 + WACC) N where‚ in a simple situation: equity debt WACC = equity + debt (cos t of equity ) + equity + debt (cos t of debt )(1 − tax rate ) Using debt for financing has a tax advantage in that interest payments are tax deductible. This tax deductibility is a source of value for the firm. In the normal NPV calculation‚ this additional value is accounted
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return expected to be received from alternate investments forgone. NPV – Present value of cash flows less the cost of acquiring the asset acquire assets with positive NPV‚ positive NPV = good project Rate of Return = profit/cost or investment (good investments have higher rate of return than opportunity cost) Higher discount rate ( lower discount factor (lower NPV Investment Decision Rules: 1. accept if positive NPV 2. accept w rate of return > opp cost or hurdle rule PV = C1*
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About Whirlpool Corporation: 1989: Whirlpool entered European Markey by buying a 53% stake in the appliance division of Dutch based Philips Electronic for $ 470 million .Formed a joint venture firm named Whirlpool International BV (WIBV). 1990: Added the whirlpool brand name to the Philips product line. 1991: whirlpool bought the rest of the Philips stake (47%) for $ 600 million to become the sole owner of Whirlpool International BV. 1991-1999: WIBV developed three pan European brands
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After a careful and thorough analysis of this project‚ in spite of the fact that it has competitive brand recognition and a new distribution center‚ we reached the conclusion that this project is not as profitable as it sounds given the negative NPV. In the following paragraphs we describe the decisions made and the reasoning behind them. In regards to the first decision we made about the use of distribution facility‚ personnel‚ and other charges‚ we went with the head of the production team’s
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constraints. If the CEC rejects a proposal there are large financial and emotional sunk costs‚ due to the long development process. Each project is evaluated in terms of its quantitative‚ qualitative‚ and strategic parameters. In calculating the NPV of these projects‚ Target uses two hurdle rates‚ 9% and 4% for the store operations and credit-card cash flows respectively‚ due to the different costs of capital. Funding credit card receivables requires less risk than funding store operations because
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Chapter 3: 2. What are some sources of risk in a systems analysis and design project‚ and how does a project manager cope with risk during the stages of project management? Many risks may arise in a systems analysis and design project and these risks can develop from the following sources: The use of new technology; with any technology that is unfamiliar‚ problems can occur that the project management and systems analysis team are not able to manage. This may lead to the use of additional
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Chemicals. To make a compelling case‚ Frank and Lucy try to make a financial model to calculate the NPV‚ IRR and Payback period for this project but are challenged on several aspects. To pursue their endeavor‚ they need to correct the model as per the feedback from the shareholders and management. Thus the problem statement is to suggest corrections to the existing model and thus calculate the NPV‚ IRR and payback period which would not be challenged further and the project could be approved. Methodology
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Case: AMERICAN CHEMICAL CORPORATION 1. Executive Summary Dixon‚ an American specialty chemical producer‚ wants to buy Collinsville plant from American Chemical Corporation‚ another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant‚ which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2‚25 mln. USD needed to buy laminate technology to increase efficiency
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B. The internal rate of return (IRR) is the rate at which [Sum of Discounted Cash Flows from t=1 to t=n] = [Cash Flow at t=0] C. The net present value is NPV is the sum of all Discounted Cash Flows‚ including the initial cash flow. D. The profitability index (PI) is the (Sum of Discounted Cash Flows from t=1 to t=n)/(Cash Flow at t=0). The NPV‚ IRR‚ and PI all give the same decision regarding whether or not to accept a single project with standard cash flows. Standard cash flows means that a single
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Emily Harris. Qualitatively‚ which one do you regard as more compelling? 2. Use the operating projections to compute a net present value (NPV) for each project. Which project creates more value? 3. Compute the internal rate of return (IRR) and payback period for each project. How should these metrics affect Harris’s deliberations? How do they compare to NPV as tools for evaluating projects? When and how would you use each? 4. What additional information does Harris need to complete her analyses
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