Capital Budgeting Techniques | | GLOSSARY Capital Budget: (1) The amount of money set aside for the purchase of fixed assets (e.g.‚ equipment‚ buildings‚ etc.). Also‚ (2) a request for authorization to purchase new fixed assets. Mutually Exclusive Proposals: Consideration of two or more assets that perform the same function. If one is chosen for purchase‚ the others are automatically rejected. Profitability Index: A ratio of the present value of the benefits (PVB) to the present value of the
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$-1350000+$890000/(1+r)+$330000/(1+r)^2+$520000/(1+r)^3=0 r=15.76% since 15.76%>14% ‚ project submarine ride should be chosen. (3)NPV(df)=$-750000+$310000/(1+14%)+$430000/(1+14%)^2+ $330000/(1+14)^3 =$75446.27 NPV(sr)=-$2100000+$1200000/(1+14%)+$760000/(1+14)^2+ $850000/(1+14)^3 =$111571.28 sinceNPV(sr)>NPV(df) ‚ project submarine ride project should be chosen. ! ! ! C7-q4 A:financial break-even point: NPV of total revenues =NPV of total costs Ct+1/12%*[1-1/(1+12%)^5]=$250000 Ct+1=$69352.43 Break-even point=[$69352.43+$360000*(1-34%)-$50000*34%]/[($25-$6)]
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of an outside investor accumulating stock at low prices (for a potential hostile takeover). Beyond just financial considerations‚ there are also strategic decisions that the company must make. Whereas ranking projects based solely on the IRR and NPV sets a short term course‚ a long term strategy must be considered. The company must decide if it wants to claim the strong hold won in the recent price wars through continued low prices and volume or if they would like to diversify further and capture
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Definitions 1. Conventional vs. Nonconventional Cash Flows 2. Independent‚ Mutually Exclusive‚ Contingent‚ Competitive and Complementary Projects B. Decision Rules for Project Evaluation/Comparison 1. Net Present Value (NPV) 3. Payback Period C. Estimation
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2. Analysis of NPV‚ IRR‚ and Payback Period To calculate this project’s NPV we had to find the respective cash flows in each year from the initial investment to the end of the five year forecast provided in Exhibit 2 at the end of the case. The initial investment for the building and all the equipment would take place in 2003 and production would begin in 2004. Therefore‚ our “Year 0” was 2003 and we calculated cash flows from operations from 2004 to 2009. To begin analyzing the case we started with
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the investment projects‚ we can use 5 main methods‚ NPV‚ IRR‚ MIRR‚ payback and discount payback. Each method has different advantage to evaluate the investment projects. It is better to use NPV and MIRR methods to evaluate the projects. NPV can provide basic accurate methods to use time value of money to estimate investments. MIRR includes both WACC and reinvestment rate; therefore‚ it is more accurate to evaluate the investments. 3. First‚ NPV is the most common and useful method. It provides a
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WORLDWIDE PAPER COMPANY Blue Ridge Mill currently purchases shortwood from a nearby competing mill for pulp production. Bob Prescott‚ the controller for Blue Ridge Mill‚ is considering the addition of a new on-site longwood woodyard. The new woodyard would have two main benefits including the ability to eliminate the need to buy shortwood from an outside source and the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company. The new woodyard would
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the required rate of return is 20 percent‚ conduct a discounted cash flow calculation to determine the NPV? Answer: - Referred (Exhibit 2.3) from the textbook. Year 1 Year 2 Year 3 Year 4 Year 5 Required ROI 20% Outflows -$50‚000 Inflows $15‚000 $25‚000 $30‚000 $20‚000 $15‚000 Total return in 5 years = $105‚000 NPV formula in Excel* = -$50‚000 + NPV (20%‚ $105‚000) NPV = $12‚895 5. You are the head of the project selection team at SIMSOX. Your team is considering three
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REPORT ON CAPESIZE PURCHASE FOR OCEAN CARRIERS Introduction The purpose of this report is to evaluate whether Ocean Carriers Inc. should immediately commission a new capesize carrier that would cost $39 million‚ and would be completed two years hence‚ in order to finalize a lease of the ship for a three-year period with a potential charterer in very good faith. The contrasting tax regulations between the two countries where the company locates its office‚ and the different cost-benefit circumstances
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order are: 1) NPV 2) MIRR 3) IRR 4) Profitability Index. For the purpose of this case‚ I have used those top four in addition to: 5)Payback period and 6) Discounted Payback Period. For the purpose of this case‚ the CFO has asked that the “four best” projects be ranked and recommended as to which the company should accept. These top four rankings are reflected with each of the six (6) quantitative ranking calculations below; however‚ if asked to select just one of the rankings‚ then NPV would be selected
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