value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects 2. A -More of Project A’s cash flows occur in the later years. 3. E - If the 4-year payback results in accepting just the right set of projects under average economic conditions‚ then this payback will result in too few long-term projects when the economy is weak 4. C - You should recommend that the project be accepted because (1) its NPV is positive and
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Capital Budgeting Analysis Project MBA 612 The General Capital Budgeting Process and how it is implemented within Organizations The general capital budgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capital budgeting decisions can mean the difference between the company’s
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bonds; which they are going to reduce de NPV. Although it can use bank loans‚ the NPV will decrease. The company can financed the new plant with only debt or only equity‚ If they use the debt to finance the NPV will increase because Kd<Ke‚ otherwise if they decided to finance themselves with equity the NPV will decrease‚ because de Ke > Kd. Also we need to analize if the NPV>0 i. Before running any numbers‚ do you expect this project to have a positive NPV based upon the underlying economics
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profit concept thus expose the weakness of profit maximization. O It doesn’t consider the time value of money or NPV of cash inflow. O It fails to consider the fluctuation of profit. O Despite this lacuna‚ Profit does matter for any kind of business. Ensuring continual profit ensures maximization of the shareholder’s wealth. Wealth Maximization: It is also known as value maximization or NPV maximization. This is possible only when‚ the firm pursues policies which would add the market value of the
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Rate @ cost of capital | 12% | | | A: Objective: Compute payback‚ NPV and IRR to decide whether Rainbow Products should purchase the machine or not. i) Bay back: cost of machine/expected saving per year = 35000/5000 = 7 years . ii) NPV = Difference between the present value of cash inflows and the present value of cash outflows. Thus‚ NPV = -35000 + 5000* [1-(1/(1.12)^15]/.12 -35000 + 34053.31 NPV = -945.68 iii) IRR: It is that rate of interest that makes the sum
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New Heritage Doll Company: Capital Budgeting Teaching Note NPV Analysis for Match My Doll Clothing Line Extension TN Exhibit 1 2010 Revenue 2011 4‚500 2012 2013 2014 2015 2016 2017 2018 2019 2020 9‚082 9‚808 10‚593 11‚440 12‚355 13‚344 14‚411 6‚860 8‚409 52.4% 22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 575 575 587 598 610 622 635 648 660 674 2‚035 3‚404 4‚291 4‚669 5‚078 5‚521 6‚000 6‚519 7‚079 7‚685 0.4522 0.4962 0.5103 0.5141 0.5178 0.5212 0
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assumptions that you used to estimate it. We first used the 15% discount rate to calculate NPV and the Cash Flows by using that discount rate we ended up with a negative NPV of $ (2‚137‚217.21). We determined that the discount rate of 15% was out dated and insufficient. Therefor to calculate a more accurate NPV for the project‚ we decided to use the rate of 9.62% that we computed. And using this number we got the NPV of $746‚981.31. I would recommend Worldwide Paper Company (WPC) to use the 9.62% discount
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cash flows? Whole bottom line c) What are the terminal cash flows? Depreciation amounts Salvage value + operating cash flow 2) Calculate the project’s NPV‚ IRR and Cash Payback. IRR= 61% NPV= $11‚051‚576 Cash Payback= 1.7011 3) Should the project be accepted? Defend your answer. Due to the fact that the NPV is positive at $11‚051‚576 and the IRR at 61% is higher than the cost of capital; the project should create revenue for the firm and therefore should be accepted.
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OCEAN CARRIERS CASE 1) Should Ls Linn purchase the $39M capsize? Make two different assumptions. First‚ assume that Ocean Carriers is a U.S. firm subject to a 35% statutory (and effective) marginal tax rate. Second‚ assume that Ocean Carriers is domiciled in Hong Kong for tax purposes‚ where ship owners are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong‚ i.e.‚ assume a zero tax rate. The
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Case 1 – New Heritage Doll Company 1. Set forth and compare the business cases for each of the two projections under consideration by Emily Harris. Which do you regard as more compelling? Productions was New Heritage´s largest division as measured by total assets‚ and easily its most asset-Intensive. Approximately 75 % of the division´s sales were made to the company´s retailing division‚ with the remaining 25% comprising private label goods manufactured for other firms. The division revenue figures
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