A) Why is the investment appraisal process so important? Capital Investment Appraisal is of fundamental importance because: 1. Large Amount of Company Resources: Involvement of large amount of company resources and efforts which will necessitate careful evaluation to be undertaken before a decision is reached. 2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The
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Tri Star Lockheed 1. (A) The payback is 35‚000/5‚000= 7 years Computation of the NPV : 15 NPV= -35‚000 + Σ 5‚000 / ( 1 + 12%)^ 15 i=1 NPV = $- 947. 67 Computation of the IRR : 15 0= -35‚000 + Σ 5‚000 / ( 1 + IRR)^ 15 i=1 IRR= 11.49% The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%) Rainbow products
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to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows‚ a payback period less than the project’s life means that the NPV is positive for a zero discount rate‚ but nothing more definitive can be said. For discount rates greater than zero‚ the payback period will still be less than the project’s life‚ but the NPV may be positive‚ zero‚ or negative‚ depending on whether the discount rate is less than‚ equal to‚ or greater than the IRR. The discounted payback includes
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of mutually exclusive investments. 5) Synthetic Resin NPV: NPV = CI – CO NPV = [(350‚000)/(1 + 0.1)^1 + (400‚000)/(1+0.1)^2 + (500‚000)/(1 + 0.1)^3 + (650‚000)/(1 + 0.1)^4 + (700‚000)/(1 + 0.1)^5] – 1‚000‚000 NPV = 1‚903‚024 – 1‚000‚000 NPV = 903‚024 Epoxy Resin NPV: NPV = [(600‚000)/(1 + 0.1)^1 + (400‚000)/(1+0.1)^2 + (300‚000)/(1 + 0.1)^3 + (200‚000)/(1 + 0.1)^4 + (200‚000)/(1 + 0.1)^5] – 1‚000‚000 NPV = 1‚362‚212 – 800‚000 NPV = 562‚212 The
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macroeconomic factors like exchange rate‚ inflation and interest rate has made the valuation of the project very complex. Compute the NPV of Ariel-Mexico’s recycling equipment by counting incremental peso cash flows at a peso interest rate. How should this NPV be translated into Euros? Assume expected future inflation for France is 3% per year. For the purpose of calculating NPV in Pesos‚ incremental cash flows of the project for the next 10 years should be calculated first. The initial outflow of cash flow
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and comparison of project appraisal techniques. The Net Present Value (NPV) method is used by 75% of firms when deciding on investment projects. The reasons for its wide use is that firstly‚ the NPV rule takes into account the time value of money‚ meaning that it recognises that a pound today is worth more than a pound tomorrow as the pound today can be invested to start earning interest immediately. Secondly‚ NPV depends solely on the forecasted cash flows from the project and the opportunity
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Metalcrafters can only choose 1 to order. Additionally‚ management had to choose between 2 parts orders between Eades Electric and Sawmasters due to limited capacity. Analysis of the future cash flows from each press is located in the appendix. The NPV method was the preferred evaluation method for reasons mentioned in the following section. The further analysis will show why the MD-40 prevails against the SX-65 as well as why the larger extrusion press is favorable to the smaller one. In addition
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present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV)‚ which is the model academics consider superior. The term capital budgeting refers to long term planning for proposal capital outlay and their financing. It includes rising long-term funds and their utilization. It may be defined as firms
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over it ’s 6 year economic life. The new truck has a 5-year MACRS life and an estimated salvage value at the end of 6 years of $2‚000. If Maplewood has a 40 percent marginal tax rate and a cost of capital of 12 percent‚ what is the NPV of the new truck? Use the Depreciation schedule listed below: (5-Year depreciation Schedule: 20%‚ 32%‚ 19%‚ 12%‚ 12%‚ 5%) Answer: Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
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the NPV approach to investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches. (30 marks) This first section of this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal‚ those of internal rate of return (IRR) and pay-back. Theoretical rationale for the NPV approach
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