expected future cash flows as in the case of Project B. Chapter 9 P9-4. LG 2: NPV Basic PVn = PMT × (PVIFA14%‚20 yrs) NPV = PVn − Initial investment NPV = $13‚246 − $10‚000 a. PVn = $2‚000 × 6.623 NPV = $3‚246 PVn = $13‚246 Calculator solution: $3‚246.26 Accept b. PVn = $3‚000 × 6.623 PVn = $19‚869 c. P9-5. Capital Budgeting Techniques: Certainty and Risk PVn = $5‚000 × 6.623 PVn = $33‚115 NPV = $19‚869 − $25‚000 NPV =
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LONDON SCHOOL OF COMMERCE. | ASSIGNMENT ON ACCOUNTING AND DECISION MAKING TECHNIQUES | | QUINCY | 4/20/2011 | (A) Why is investment appraisal process so important? Answer Capital investment involves the commitment of large amounts of company resources‚ which will necessitate careful evaluation to be undertaken before a decision is reached. The investment appraisal process helps managers make the right investment decisions as regards what projects to invest in to maximize shareholders
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general level of interest rates. This is called project’s required rate of return or cost of capital in capital budgeting. Then‚ find the PV of expected cash flows and the asset’s rate of return. If the PV of the inflows is greater than PV of outflows (NPV is positive)‚ or if the calculated rate of return (IRR) is higher than the project cost of capital‚ accept the project. Question b What is the difference between independent and mutually exclusive projects? Between normal and non-normal projects
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capital budgeting project. a. True b. False ANSWER: False 3. Assuming that their NPVs based on the firm’s cost of capital are equal‚ the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life. a. True b. False ANSWER: False 4. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR‚ then the project should be accepted. a. True b. False ANSWER:
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Assignment Chapter 11 Assignment Chapter 11 True/False Indicate whether the statement is true or false. ____ 1. Assuming that their NPVs based on the firm’s cost of capital are equal‚ the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life. ____ 2. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with
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changes of sign C – 1 NPV: is the sum of all cash inflows and outflows of a project C - 2 - The rationale behind the NPV method is that it is equal to PV of inflows minus the cost which is the net gain in wealth. If the projects are mutually exclusive we will choose the project with the highest NPV and here in our case we will choose project S since it has a greater NPV compared to project S (19.98>18.79). If the projects are independent we will choose both. C - 3 The NPV will change if the WACC
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Value (NPV) for capital expenditures. However‚ the company needs to keep in mind the exchange rate between Mexican Pesos and Euros‚ as well as the inflation rates over time and the risks involved with this type of investment. Indeed‚ a major challenge for the analysis will be deciding which currency to use between the Euro and the peso. Scenario #1: Mexican Inflation = 7% Given the fact that the expected future inflation is 7% for Mexico and 3% for France. The discount rate used for the Peso NPV can
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INTRODUCTION TO CAPITAL BUDGETING Overview 159 7.1 The NPV Rule for Judging Investments and Projects 159 7.2 The IRR Rule for Judging Investments 161 7.3 NPV or IRR‚ Which to Use? 162 7.4 The “Yes–No” Criterion: When Do IRR and NPV Give the Same Answer? 163 7.5 Do NPV and IRR Produce the Same Project Rankings? 164 7.6 Capital Budgeting Principle: Ignore Sunk Costs and Consider Only Marginal Cash Flows 168 7.7 Capital Budgeting Principle: Don’t Forget the Effects of Taxes—Sally and Dave’s
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years Cost of capital 12% A. payback?‚ NPV?‚ IRR? Payback: The amount of time required for a firm to recover its initial investment. by dividing the initial investment by the annual cash inflow. In our case $35.000/$5000= 7years NPV: Investment- the PV of its cash inflows discounted at a rate( the firm’s cost of capital) NPV= -$35.000- $34.054= -$946 so NPV less than $0‚ the project rejected IRR: discount rate‚ with IRR the NPV=0 IRR= 11‚49% IRR less than the cost of capital
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FINANCIAL MANAGEMENT: CAPITAL BUDGETING MINI CASE 1 CAPITAL BUDGETING (MINI CASE) QUESTION A What is capital budgeting? Solution: Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore‚ a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this‚ a sound procedure to evaluate
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