irreversible; the managers aim to maximize shareholder`s wealth by maximizing long-term returns‚ taking account of risk and liquidity. Capital investment decisions normally represent the most important decisions that the managers make to choose the best investments to take using the capital appraisal methods. Some of the capital appraisal methods ignore the time value of money like payback and Accounting Rate of Return (ARR) as they depend on the cash flow and the profit made by this investment‚ the
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to best advantage and so good investment decisions are vital to successful financial management. There are several techniques available whereby investment proposals can be evaluated. Since‚ however‚ all require projections of future costs and returns they cannot be guaranteed to lead to successful decisions. It can‚ perhaps be claimed that they increase the probability of success. A highly sophisticated‚ apparently accurate‚ method of project appraisal with sound theoretical basis will not
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found that (Net Present Value ‚ NPV) = 51‚506‚864 which is more than zero ‚ (Internal Rate of Return ‚ IRR) = 16.66% which is more than desired rate of return (15%) and (Payback Period) = 14.22 years so this project should be invested. Moreover‚ we do sensitivity analysis for study about factors that can effected pre-feasibility study and found that the price of biodiesel is factor that most effected Internal Rate of Return ‚ IRR Keywords : Biodiesel ‚ Waste cooking oil ‚ Solid catalyst
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MGMT 640 Section 9056‚ Mid-term Exam Fall 2010 This exam consists of 33 multiple-choice questions. Enter your answers on the Answer tab of the Excel spreadsheet that has been provided. (The worksheet tabs are located at the bottom of your worksheet.) Put your calculations on the Calculations tab as evidence of your work. Your calculations will be used as evidence of your independent work only and will not be used for partial credit for incorrect answers. Change the Excel file name to include
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project to be accepted the NPV should be positive‚ because it means the return is greater than the required rate of return; or zero‚ because that means the return is equal to the required rate of return. However‚ if negative the project should be rejected‚ because its return is less than the required rate of return. This required rate of return is also referred to as the cost of capital. When cost of capital is used a discount rate it serves as a screening device to advise the company on accepting or
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the efficiency of the capital budgeting process. 9.4 Explain the decision rules—that is‚ under what conditions a project is acceptable—for each of the following capital budgeting methods: a. Net present value (NPV) b. Internal rate of return (IRR) c. Modified internal rate of return (MIRR) d. Traditional payback (PB) e. Discounted payback (DPB) a. Should only be undertaken if NPV is greater than 0. b. Should only be undertaken if IRR is greater than the cost of capital. c. The MIRR will yield the
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Problems − Solutions Dr. Stanley D. Longhofer 1) Jim makes a deposit of $12‚000 in a bank account. The deposit is to earn interest annually at the rate of 9 percent for seven years. a) How much will Jim have on deposit at the end of seven years? P/Y = 1‚ N = 7‚ I = 9‚ PV = 12‚000‚ PMT = 0 ⇒ FV = $21‚936.47 b) Assuming the deposit earned a 9 percent rate of interest compounded quarterly‚ how much would he have at the end of seven years? P/Y = 4‚ N = 7 × 4 = 28 ⇒ FV = $22‚374.54 c) In comparing parts
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employee $2‚500 Other annual benefits per employee-% of wages 18% Cost of raw materials per can $0.25 Other variable production costs per can $0.05 Costs to purchase cans - per can $0.45 Required rate of return 12% Tax rate 35% Make Purchase Cost to produce Annual cost of direct material: Need of 1‚100‚000 cans per year $330‚000 Annual cost of direct labor for new employees: Wages 72‚000
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Accounting rate of return method If you have already studied other capital budgeting methods (net present value method‚ internal rate of return method and payback method)‚ you may have noticed that all these methods focus on cash flows. But accounting rate of return method uses expected net operating income to be generated by the investment proposal rather than focusing on cash flows to evaluate an investment proposal. Under this method‚ the asset’s expected accounting rate of return is computed
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risk and expected return and is often used to estimate a cost of equity (Investopedia‚ 2009). The cost of equity(COE) of the discount rate is: R = Rf + β*(E - Rf) (1) Rf = Risk free rate of return‚ usually U.S. treasury bonds β = Beta for a company E = Expected return of the market (commercial airlines market) (E - Rf) = Sometimes referred to as the risk premium The following table shows the average annual arithmetic returns investors earned on
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