Notes: FIN 303 Spring 09‚ Part 7 – Capital Budgeting Professor James P. Dow‚ Jr. Part 7. Capital Budgeting What is Capital Budgeting? Nancy Garcia and Digital Solutions Digital Solutions‚ a software development house‚ is considering a number of new projects‚ including a joint venture with another company. Digital Solutions would provide the software expertise to do the development‚ while the other company‚ American Financial Consultants (AFC) would be responsible for the marketing.
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A PROJECT REPORT ON RISK ANALYSIS OF REBUILDING OFCOKE OVEN BATTERY NUMBER 4 OF ROURKELA STEEL PLANT STEEL AUTHORITY OF INDIA LIMITED (SAIL) Prepared by: Vineet Bhatia PGDM Roll No. 117 BIMTECH Corporate Guide: Academic Guide: Mr. Ravichandran Prof.A.K.Malhotra AGM (Finance) Faculty-Finance New Delhi BIMTECH 2 Summer Project Certificate This is to certify that Mr. Vineet Bhatia Roll No. 117/2006 a student of PGDM has worked on Summer project titled___ Risk Analysis of rebuilding
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Chapter 4 MARKET AND DEMAND ANALYSIS 1. We have to estimate the parameters a and b in the linear relationship Yt = a + bT Using the least squares method. According to the least squares method the parameters are: ∑ T Y – n T Y b = ∑ T 2 – n T 2 a = Y – bT The parameters are calculated below: Calculation in the Least Squares Method T Y TY T 2 1 2‚000 2‚000 1 2 2‚200 4‚400 4 3 2‚100 6‚300 9 4 2‚300 9‚200 16 5 2‚500 12‚500 25 6 3‚200 19‚200 36 7 3‚600 25
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On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable or suitable (economically)
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discounting cash flows and the analysis of the NPV of both projects. An investment with a positive and high NPV is profitable investment and is more likely to me accepted by the company. A positive NPV means that the investment creates value and therefore the project generate enough cash flow to cover the cost and provide enough returns to the shareholders. In the case of a negative NPV‚ the investment should not be supported. Through a focus on NPV results of both projects we can conclude that the
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little differently; therefore‚ be prepared! a) Under which conditions would the IRR and the NPV rank projects differently? **LIST** i) Significant differences in the sizes of the projects ii) Significant differences in the timing of the cash flows of the projects. b) Under which conditions would there be a call for different project selections after obtaining the IRR and NPV project rankings? **LIST** iii) Mutual exclusion (selection of one precludes the selection
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capital is 12%. a. What is the project’s PP (time thu hồi dc vốn)? b. What is the project’s DPP? c. What is the project’s NPV? d. What is the project’s IRR? a) PP = 52‚125/12‚000 = 4.34 b) 52‚125 – 12‚000/1.12 – 12‚000/1.12^2 – 12‚000/1.12^3 – 12‚000/1.12^4 – 12‚000/1.12^5 – 12‚000/1.12^6 = 2788 PV (7) = 12000/1.12^7 = 5428 DPP = 6 + 2788/5428 = 6.5 years c) NPV = 12‚000*[(1-1/(1+0.12)^8]/0.12 – 52‚125 = 7486.7 d) 12‚000 * [1-1/(1+IRR)^8]/IRR – 52‚125 = 0 => IRR = 16% Exercise 2:
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Under what circumstances will the IRR and NPV rules lead to the same accept-reject decisions? When might they conflict? Using the IRR and NPV rules will always yield the same decision as long as two conditions are met: the project or investment’s cash flows are conventional and the project or investment is independent. If the initial cash flow is negative and all the subsequent cash flows are positive‚ the cash flows are said to be conventional. If at any point any of the 2nd or later cash flows
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new factory. 2. Sales of $3 million a year that will result in an increase of $150‚000 in gross margin giving the company a 5% gross margin. 3. Value of salvage at the end of the life of the project of $14 million. NPV Computation The following table displays the NPV computation with a 10% weighted average cost of capital for this project. Year | Cash Flow | PV Factor | Present Value | 0 | (10‚000‚000) | 1.0000 | (10‚000‚000) | 1 | 150‚000 | 0.9091 | 136
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cost of a project is $100‚000. Sales are for five years‚ starting next year. The company earns $0.50 per sale‚ and expects to sell 60‚000 units per year. If the interest rate is 5%‚ the NPV is -100‚000 +129‚884 = 29‚884. At what level of sales does the project break even in terms of NPV? Set PV = -100‚000 (so that NPV = 0) and find the amount of sales per year. The answer is sales in dollars = 23‚097 so that sales in units = 46‚194. Break-even analysis is a good starting point‚ but it ignores some
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