Integrated Case: Week 5 Allied Components Company
Integrated Case Week 5 Allied Components Company
a. What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions?
Since capital budgeting decisions are critical for a company it typically would include fixed assets, construction of a building and or factory. It comes with a lot of risk management and analysis which is what an individual would do when trying to figure out if an investment is right for them or not. There are some steps that are included such as
1. Estimating cash flows
2. Access the risk
3. Determine the appropriate discount rate
4. Find the PV and rate of return
b. What is the difference between independent and mutually exclusive projects? Between …show more content…
If the projects were mutually exclusive there would be a conflict of interest being according to the IRR rule you would pick project S and according to the NVP rule it is telling us to pick Project L.
f. 1. What is the underlying cause of ranking conflicts between NVP and IRR?
There are conflicts when it comes to NVP and IRR because of the size of a project and the size and timing pattern of cash flows. It would not show accurate information when comparing the larger projects to smaller ones.
2. What is the reinvestment rate assumption, and how does it affect the NVP versus IRR conflict?
The reinvestment rate assumption is the underlying cause of ranking conflicts. This would affect NVP because the calculation has the assumption that the cash flows can be reinvested at a projects cost of capital.
3. Which method is best? Why?
NVP would be better because a project’s cash flows are used as substitutions for outside capital, therefore saving the company money because they do not need to get outside capital for things.
g. 1. Define the term Modified IRR (MIRR). Find the MIRRs for project L and S. MIRR is the discount rate that equates the PV of the value of inflows, the cost of capital, and PV of
a. What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions?
Since capital budgeting decisions are critical for a company it typically would include fixed assets, construction of a building and or factory. It comes with a lot of risk management and analysis which is what an individual would do when trying to figure out if an investment is right for them or not. There are some steps that are included such as
1. Estimating cash flows
2. Access the risk
3. Determine the appropriate discount rate
4. Find the PV and rate of return
b. What is the difference between independent and mutually exclusive projects? Between …show more content…
If the projects were mutually exclusive there would be a conflict of interest being according to the IRR rule you would pick project S and according to the NVP rule it is telling us to pick Project L.
f. 1. What is the underlying cause of ranking conflicts between NVP and IRR?
There are conflicts when it comes to NVP and IRR because of the size of a project and the size and timing pattern of cash flows. It would not show accurate information when comparing the larger projects to smaller ones.
2. What is the reinvestment rate assumption, and how does it affect the NVP versus IRR conflict?
The reinvestment rate assumption is the underlying cause of ranking conflicts. This would affect NVP because the calculation has the assumption that the cash flows can be reinvested at a projects cost of capital.
3. Which method is best? Why?
NVP would be better because a project’s cash flows are used as substitutions for outside capital, therefore saving the company money because they do not need to get outside capital for things.
g. 1. Define the term Modified IRR (MIRR). Find the MIRRs for project L and S. MIRR is the discount rate that equates the PV of the value of inflows, the cost of capital, and PV of