there is no cannibalization effect to our sales from the other’s producer’s activities. In the case that we accept the leasing proposal‚ assume an agreement for 4 years and receive the payment at the end of each period‚ we have a NPV of $75‚933‚ which is lower than the NPV of our project which is $1‚203‚759. So‚ assuming equal life of the projects and no other side-effects‚ we would prefer to go on with the Lite project and not to lease the production. The fact that we decide to go on with the
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calculation evaluates a future stream of benefits and expenses by converting them to present values. A discount rate is used to discounted future benefits and the total sum of discounted costs is subtracted form the benefits. The relevant formula for NPV is: Where t - the time of the cash flow n - the total time of the project r - the discount rate Ct - the net cash flow (the amount of cash) at that point in time. C0 - the capitial outlay at the beginning of the investment time ( t = 0 ) (Wikipedia
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company has estimated that the project’s NPV is $3 million‚ but this does not consider that the new laundry detergent will reduce the revenues received on its existing laundry detergent products. Specifically‚ the company estimates that if it develops WOW the company will lose $500‚000 in after-tax cash flows during each of the next 10 years because of the cannibalization of its existing products. Ellison’s WACC is 10 percent. What is the net present value (NPV) of undertaking WOW after considering
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paid off in equal annual installments over the project’s 10-year life. A) Calculate APV. APV = NPV + PV of debt tax shield NPV = PV of cash flows - initial investment Initial Investment 10‚000‚000 Cash flows 1‚750‚000 Period 10 years Discounting rate 12% PV of cash flows 9‚887‚890 using the PV function NPV (112‚110) We now calculate the PV of debt tax shield Year Debt Outstanding at Start of Year Interest Interest
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Internal Rate of Return Meaning of Capital Budgeting Capital budgeting can be defined as the process of analyzing‚ evaluating‚ and deciding whether resources should be allocated to a project or not. Capital budgeting addresses the issue of strategic long-term investment decisions. Process of capital budgeting ensure optimal allocation of resources and helps management work towards the goal of shareholder wealth maximization. Why Capital Budgeting is so Important? Involve
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11 - 1 11 - 2 Choosing the Optimal Capital Budget Finance theory says to accept all positive NPV projects. Two problems can occur when there is not enough internally generated cash to fund all positive NPV projects: Increasing Marginal Cost of Capital Externally raised capital can have large flotation costs‚ which increase the cost of capital. Investors often perceive large capital budgets as being risky‚ which drives up the cost of capital. (More...) An increasing marginal
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AF 3313 2011-12 Sem 2 Written Assignment Name: Kam Lai Yee ID: 09550708d Tutor: Howard Chow Q1. Efficient market is one in which stock prices fully reflect the information of a company‚ either positive or negative. If the information from a company is positive‚ investor will give a good response and the price of shares of this company will increase. Since the information is reflected in price at once‚ normal rate of return should only be obtained. Also the price that the firm received
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Dongyeon Kim 1408392 Di Roberto Matteo 1681386 Gutiérrez Agustina María Manuela Rinaldi Claudia Valeri Stefano 1672146 Case Study: Ocean Carriers Corporate Finance Class 16 Group Name: Soul Analysts Ltd Executive summary Ocean Carriers is contemplating the opportunity of stipulating a 3-year leasing contract that would require commissioning the construction of a new vessel. In the short term applied hire rates are decreasing‚ just as they should be on the recovery side starting
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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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INDEX PAGE Page 1.0 Executive Summary 2 2.0 2.1 2.2 2.3 2.4 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Case Study 1 (Simpson and Selph LTD) Introduction Question 1 Question 2 Question 3 Case Study 2 (Fly – by – Night Airlines) Introduction Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 4 4 6 7 8 10 10 11 12 13 15 15 15 4.0 Conclusion and Recommendation 15 5.0 Bibliography 16 6.0 Declaration by Student 17 1.0 EXECUTIVE SUMMARY This assignment
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