A Comparison of Capital Budgeting Techniques Capital budgeting deals with setting the criteria and prescribing the process required for making capital investment choices. Choosing an investment project‚ that is‚ making a capital investment choice is ultimately a cost/benefit analysis. It requires valuing the project by comparing the payoff to its costs. Problem Value‚ rank and select investment projects Example 1. Project A Required rate year 1: year 2 year 3 year 4 year 5 Initial
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[pic] MASTER of BUSINESS ADMINISTRATION ECONOMICS FOR MANAGERS MTKM 5033 CAPITAL BUDGETING BY; MOHD FIRDAUS IBRAHIM M061310005 NORZAHFRAN NORJAMAL M061310034 ABU HANIFAH BIN A. JALAL M061310004 INSTRUCTOR; DR. SENTOT IMAM WAHJONO Table of content Page___ CAPITAL BUDGETING DEFINED 3 Categories of investment THE CAPITAL BUDGETING PROCESS 4 CAPITAL BUDGETING DECISION RULES 5 New project decision rules of capital
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l. In a 1‚050-1‚500-word memo‚ define‚ analyze‚ and interpret the answers to items (c) through (h). Present the rationale behind each item and why it supports your decision stated in item (i). Also‚ attempt to describe the relationship between NPV and IRR. (Hint: The key factor here is the discount rate used.) In this memo‚ explain how you would analyze projects differently if they
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invest 8 8 PI 0.902 4 Calc annual OCF 8 8 IRR 14.12% 4 Calc terminal year 8 8 MIRR 16.10% 4 Net Project CF 8 8 NPV ($2‚295‚332.62) 4 Cum CF 2 2 Results area 20 20 Question 1 6 6 Questions Question 2 6 6 1) Using your spreadsheet model‚ indicate how much change in NPV occurs with a +1% increase in the discount rate. Question 3 4 4 Question 4 2 2 Question 5 12 12 NPV (at 19%) -2295333 —> note: type number here‚
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Fonderia di Torino S.p.A. 1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value(NPV) warrant the investment in the machine? Initial Case Outlay Price of new machine (1‚010‚000) Current after-tax market value of old machine [130‚000+{(415‚807-130‚682) -130‚000}*0.43]= 196‚704 Net outlay for new machine -1‚010‚000+196‚704 = -813‚296 Appropriate
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Year 4 $ 155‚000 $ 145‚000 A) Neither proposal would add value. B) Choose Proposal A because it has the highest IRR. C) Choose Proposal A because it has the highest NPV. D) Choose Proposal B because it has the highest IRR. E) Choose Proposal B because it has the highest NPV. Answer: A [NPV for A: $(2‚548); NPV for B: $(3‚892)] 2. You’re evaluating a proposed business project and you want to know what is the Internal Rate of Return. Based on the following estimated Free Cash Flows
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Capital Budgeting Rules: NPV‚ IRR‚ Payback‚ Discounted Payback‚ AAR Categories of Plans 1. Replacement Projects: decisions to replace old equipment – those are among the easier of capital budgeting techniques. It is important to decide whether to replace the equipment when it wears out or to invest in repairing the machine. 2. Expansion Projects: These are decisions whether to increase the size of business or not – they are more uncertain than replacement projects. 3. New products and services: These
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Capital budgeting is the process of evaluating a company’s potential investments and deciding which ones to accept. A company’s market value added (MVA) is the sum of all its projects’ net present values (NPVs). Basically‚ one can calculate the free cash flows (FCFs) for a project in much the same way as for a firm. When a project’s free cash flows are discounted at the appropriate risk-adjusted rate‚ the result is the project’s value. One difference between valuing a firm and a project is the
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( Answers to Mini-Case Questions BioCom Inc. This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period‚ discounted payback period‚ NPV‚ IRR‚ MIRR‚ and PI. 1. Compute the payback period for each project. |Time of Cash Flow |Nano Test Tubes |Microsurgery Kit | |Investment |−$11‚000.00 |−$11‚000.00
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to evaluate a potential investment. There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are 1) Net present value: NPV is a discounted cash flow technique‚ which is the difference between an investment’s market value and its cost. NPV = Present value of cash inflow- Present value of cash outflow The investment should be accepted if the net present value is positive and rejected if it is negative. 2) Profitability
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