the factory‚ no additional fixed costs would be incurred if this proposal is accepted. It is expected that cans would cost 45¢ each if purchased from the current supplier. The company’s minimum rate of return (hurdle rate) has been determined to be 12% for all new projects‚ and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint‚ as well as the number of units sold‚ will not be affected by this decision. The unit-of-production depreciation method would
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The organization is planning a free cash flow investment and evaluating a project to determine the net present value of the business proposal. In the project financial analyst from Caledonia Products will consider the net value versus the internal rate of return. The research will determine if the organization will become profitable over the duration of five years. Research will also analyze if the investment will be a deficit to the company’s production over the duration of the project. A factor
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1. When a firm maximizes profits it will simultaneously minimize opportunity costs. Answer: True Terms to Learn: opportunity cost 2. The usual starting point in budgeting is to forecast net income. Answer: False Terms to Learn: operating budget The usual starting point in budgeting is to forecast sales demand and revenues. 3. If the $17‚000 spent to purchase inventory could be invested and earn interest of $1‚000‚ then the opportunity cost of holding inventory
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Chapter 1: Introduction ------------------------------------------------- 1.1 Introduction Rice is the staple food for 65% of the population in India. It is the largest consumed calorie source among the food grains. With a per capita availability of 73.8 kg it meets 31% of the total calorie requirement of the population. India is the second largest producer of rice in the world next to China. The all India area‚ production‚ and yield of rice in the year 2001-02 was 44.62 million hectares‚ 93.08
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all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive‚ it indicates that the! A. resultant amount is the maximum that should be paid for the asset.! B. discount rate used is not the proper required rate of return for this company.! C. investment is the best alternative.! D. return on the investment exceeds the company’s required rate of return.! ! ! The following data apply to questions 2 through 6.! The Hilltop Corporation is considering
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Risk‚ Return and Capital Budgeting Chapter 12 • Beta is a measure of market risk – Beta = covariance(A‚ market) market standard deviation – Beta = correlation(A‚ market) x stock standard deviation standard deviation of market – Portfolio Beta = weighted average of the betas of all the stocks in the portfolio * The Beta of the market portfolio is always 1 Capital Asset Pricing Model • Return = Rf + β( Rm – Rf) – Rf is the risk free rate which is the rate of return on treasury
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organizations to make their capital budgeting (CB) decisions or the alternative projects can be ranked in line with the benefits arrived in terms of profitability and the revenue generated. (Gitman‚ 2008). Net present value (NPV)‚ internal rate of return (IRR)‚ accounting rate of return (ARR) and PBK are generally described as the most commonly used CBTs. The two former techniques are based on the cash-flow concept and are usually categorized as sophisticated techniques. Bierman & Smidt (1993 cited in Axelsson
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Capital Budget Recommendation Guillermo Furniture Overview Guillermo Navalez is an owner of a small furniture manufacturing company near his home‚ Sonora‚ Mexico. Sonora offers mild weather‚ beautiful scenery‚ and inexpensive housing. Guillermo is the largest manufacturer of furniture in his area where the supply of timber for tables and chairs is easily accessible due to the nature of resources (University of Phoenix‚ 2010). Labor is also inexpensive and Guillermo was making profit up until
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(NPVs). Basically‚ one can calculate the free cash flows (FCFs) for a project in much the same way as for a firm. When a project’s free cash flows are discounted at the appropriate risk-adjusted rate‚ the result is the project’s value. One difference between valuing a firm and a project is the rate that is used to discount cash flows. For a firm‚ it is the overall weighted cost of capital‚ while for a project‚ it is r‚ the project’s risk adjusted cost of capital. Subtracting the initial cost
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money received and any risk associated with the cash flows. IRR (Internal Rate of Return) indicates the annual rate of return on an investment that assumes we could reinvest the cash flow at the same return. The IRR for purchasing and developing the product are 15.11% and 20.60% respectively. IRR tends to favor a larger scale project with larger cash flows in earlier time periods. It also suffers from in inaccurate reinvestment rate. We turn to MIRR to
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