considering a project that has an up-front cost of $3 million and produces an expected cash flow of $500‚000 at the end of each of the next five years. The project’s cost of capital is 10 percent. Based on this information what is the project’s net present value? Answer : -$1‚104‚607 4. If Diplomat goes ahead with this
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Product will pay back the original investment costs 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
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Just in time (JIT): is a production strategy that strives to improve a business’ return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives‚ the process relies on signals or Kanban between different points‚ which are involved in the process‚ which tell production when to make the next part. Kanban are usually ’tickets’ but can be simple visual signals‚ such as the presence or absence of a part on a shelf. Implemented correctly‚ JIT focuses on continuous
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using various financial ratios; for the benefit of potential shareholders‚ lenders or suppliers. The report also indicates how non-financial performance indicators can help an organisation measure performance. This report will also look into the net present value method of appraisal‚ and explain its advantages and disadvantages. 2.0 Main Content The focus of the first part of this report is to analyse the performance of the ITE Group. The “ITE is one of the world’s leading organisers of international
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is not able to meet the supply. Hence Mr. Ian McCarthy has to decide to either build the capacity of manufacturing the plastic parts in house or to buy Genie tech who are ready to sell their firm to Bergerac. The capacity of the current machines present in genie tech and the expenses are tabulated‚ similarly the expenses and capital costs of building capacity in house are also given. Mr. McCarthy has used the data collected to calculate a projection to the year 2010 by backward integration options
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! !! CHAPTER 21! Sample Exam Questions! ! 1. [CPA Adapted] If the algebraic sum of the present values of 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
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We classify the errors in six main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors. Keywords: valuation‚ company valuation‚ valuation errors JEL Classification: G12 ‚ G31‚ M21 November 4‚ 2003 1 80 common
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residual value. As of January 1‚ 2013‚ Bateman has converted the building into an Internet Learning Center where classes on Internet usage will be conducted six days a week. Because of the change in the use of the building‚ Bateman is evaluating the building for possible impairment. Bateman estimates that the building has a remaining useful life of 10 years‚ that its residual value will be zero‚ that net cash inflow from the building will be $400‚000 per year‚ and that the current fair value of the
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CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash
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of cash. Net Present Value The net present value (NPV) measures the discounted value of cash inflows to cash outflows‚ to determine the profitability of a capital investment. The investment is deemed profitable if the net present value is greater than zero. The NPV is calculated by subtracting cash outflows (cost of investments) from the present value of future inflows (freedictionary). Internal Rate of Return The internal rate of return (IRR) is the rate that the present value of cash inflows
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