because it payback period is less than the 4 year maximum payback period 3.65years < 4 years ---------------------------------------- PART B: NPV &IRR LATHE A NPV & IRR years 0 1 2 3 4 5 cash flow (660‚000) 128‚000 182‚000 166‚000 168‚000 450‚000 cash flows (360‚000) 88‚000 120‚000 96‚000 86‚000 207‚000 LATHE B NPV & IRR PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV (660‚000) 113‚274 142
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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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provided the pay back time shall be 35000/5000 = 7 years. Formula for net present value NPV is as follows (CALCULATING NET PRESENTVALUE‚ PAYBACK PERIOD‚ AND RETURN ON INVESTMENT): 15 NPV= -35‚000 + ∑ 5‚000 / (1 + 12%) ^ 15 i=1 = $947 The IRR 15 0= -35‚000 + ∑ 5‚000 / (1 + IRR) ^ 15 i=1 = 11.49% From the above calculation it can be projected that the net present value is negative and the IRR is also lover
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Answers to Problem Sets 1. a. A = 3 years‚ B = 2 years‚ C = 3 years b. B c. A‚ B‚ and C d. B and C (NPVB = $3‚378; NPVC = $2‚405) e. True f. It will accept no negative-NPV projects but will turn down some with positive NPVs. A project can have positive NPV if all future cash flows are considered but still do not meet the stated cutoff period. 2. Given the cash flows C0‚ C1‚ . . . ‚ CT‚ IRR is defined by: It is calculated by trial and error
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sensitive to cost changes. NPV and IRR remains’ positive for all options of sensitivity analysis. Table 1. Sensitivity analysis (000 ’s) 2% (-2%) 4% 7% (+3%) 10% (6%) NPV IRR NPV IRR NPV IRR NPV IRR Gas $3‚302.70 34% $3‚772.49 35% $4‚577.42 38% $5‚521.53 40% Battery $2‚574.25 28% $3‚004.41 30% $2‚574.25 32% $4‚605.90 35% Bio Diesel $2‚812.34 29% $3‚249.17 31% $3‚997.59 33% $4‚875.44 36% The key findings are that when using the NPV model to evaluate the
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payback and Accounting Rate of Return (ARR) as they depend on the cash flow and the profit made by this investment‚ the other methods take into consideration the time value of money using a technique called Discounted Cash Flow like Net Present Value (NPV) and Internal Rate of Return (IRR). The payback method is one of the simplest and most frequently used methods of capital investment appraisal. It is defined as the period in months or years that is required for a stream of cash earnings from an
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determines the economic feasibility of “Voodoo Love” based on the net present value (NPV) of its cash flows and the internal rate of return (IRR) over the 5 year period. We have made certain assumptions to calculate the final numbers which are outlined below. The “Appendix” contains the detailed calculations. Based on our calculations the project is economically feasible. The NPV of the project is $130‚961. A positive NPV implies that the present values of the cash outflows outweigh the present values
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which are likely software upgrades that are notorious for running over time and over budget. Management should therefore run multiple scenarios based on potential cost and time overrun scenarios to assess under which circumstances the project stays NPV positive. Advertising campaigns are less likely to cause surprises on the investment side since they can be limited to a certain budget‚ but their success is very hard to predict. Even if the agency that Ameritrade ultimately selects can more or
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Assignment 2- Sliced Bread Group Executive Summary * This report is provided to the Board of Directors of Sliced Bread Group advising on a suitable method of performance appraisal for Divisional Managers | Grain | Bakery | Divisional Profit ( in $000s) | 3‚260 | 1‚741 | HO costs (in $000s) | 440 | 259 | Controllable Divisional Profit (in 000s) | 3‚700 | 2‚000 | Controllable Divisional Investment (in $000s) | 18‚500 | 12‚500 | ROCE | 20.0% | 16.0% | * It is arguable that allocated
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Bilal Al- Qureshi‚ Said Business School‚ University of Oxford 2010 American Chemical Corporation HBS Case Number: 9-290-102 Executive Summary The American Chemical Corporation (AMC) is a large‚ diversified chemical producer. In 1979‚ AMC was forced to issue a tender to sell a Sodium Chlorate plant‚ near Collinsville‚ Alabama. Dixon‚ a specialty chemicals company‚ was willing to purchase the aforementioned plant for $12m with the option to invest a further $2.25m on laminate technology. The
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