should be accepted without any further consideration‚ assuming we are confident that the cash flows and the required rate of return have been properly estimated. Question 2 Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows? Payback Question 3 A(n) ____ is the return on the best alternative use of an asset‚ the highest return that will not be earned if funds are not invested in a particular project. opportunity cost Question 4 Tapley
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Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5‚997‚505.31 with an IRR of 13.21%‚ a profitability index of 8.84‚ and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values
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Period‚ Average Accounting Return‚ Internal Rate of Return (IRR) and Profitability Index (PI). (You can start by considering the following questions for each investment rule: Does it use cash flows or accounting earnings? Does it consider all cash flows or not? Does it apply a proper discount rate? Whether the acceptance criteria are clear and reasonable? In what situation it can be applied? What kind of weakness does it have?) (4 points) Firstly‚ Average accounting return (AAR) is calculated by
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Fundamentals of corporate finance (European edition) by David Hillier Quartile 4 IBA Chapter 1 - 14 Chapter 1 Introduction to corporate finance 1.1 Corporate finance and the financial manager Corporate finance must be considered with three basic types of question: 1. What long-term investments to make 2. Where will we get the money for those investments from 3. How will we manage everyday financial activities 1. What long-term investment to make: To process of planning and
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and added the retained earnings. To find the market value of the debt we used the book value and found a yield to maturity of nine years and then compared it to the market value of similar bonds with a maturity of 20 years. We were given the tax rate of 34%‚ which we subtract from one and multiply times the cost of debt to find the after tax cost of debt. The only other missing variable left was beta; we used the pure play method to find the beta based on the industry average beta. Our final
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Project Selection In a 2001 Graham and Harvey survey of 392 chief financial officers (CFOs) asked “how frequently they used different capital budgeting methods?” Approximately 75% of the CFOs replied that they use net present value (NPV) or Internal Rate of Return (IRR) always or almost always (Smart‚ Megginson & Gitman‚ 2004‚ pg. 251). Projects are viewed as capital investments in the corporate world‚ and as such‚ are evaluated closely for their possible financial impacts on the “bottom line”
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treasury jobs & there is no separate treasurer / treasury department exists Question 1b: firm purchases a machinery for Rs. 8‚ 00‚000 by making a down payment of Rs.1‚50‚000 and remainder in equal installments of Rs. 1‚50‚000 for six years. What is the rate of interest to the firm? Answer to Q1b: Particulars Cost of Machinery Down Payment made by firm Financed through borrowings Ref Year 0 (a) 800‚000 (b) c
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this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal‚ those of internal rate of return (IRR) and pay-back. Theoretical rationale for the NPV approach The net present value rule or NPV devised by Hirshleifer (1958)‚ is the fundamental model of how firms decide whether to invest in a project‚ commonly known as the ‘investment
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after 7 years. Net Present Value is -$946 and IRR is 11.49%. Rainbow Products should not purchase the machine according to the results of NPV and IRR calculation. The net present value of purchasing this new equipment is negative‚ and the internal rate of return is less than the cost of capital; thus both calculations confirm that the investment will not provide additional value to the company. Of course the payback method shows that the instrument will have paid back the cost in 7 years but does
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12 Comparison of Capital Budgeting Techniques The Dilemma at Day-Pro The Day-Pro Chemical Corporation‚ established in 1995‚ has managed to earn a consistently high rate of return on its investments. The secret of its success has been the strategic and timely development‚ manufacturing‚ and marketing of innovative products that have been used in various industries. Currently‚ the management of the company is considering the manufacture of a thermosetting resin as packaging material for electronic
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