important to take each of these techniques into consideration and choose the one that will best represent the decision to be made. Differentiate between various capital budget evaluation techniques One evaluation technique is the Net Present Value or NPV. NPV is used to determine how profitable a capital investment will be. Investopedia states that due to the time value of money “a dollar earned in the future will not be worth as much as one earned today.” (Investopedia) Net present value takes into
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Capital Budget Recommendation Guillermo Navallez is the owner of Guillermo Furniture‚ a company that manufactures midgrade and high-end sofas. Recent changes in the business environment and economy have prompted Guillermo act fast before he is forced out of business. After doing some research‚ Guillermo identified some possible investment options that would improve his businesses ’ financial condition. A capital budget
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5Running head: GUILLERMO FURNITURE SCENARIO Guillermo Furniture Store Scenario University of Phoenix FIN/571 Guillermo Furniture Store Scenario Guillermo Navallaz is the proud owner of Guillermo’s Furniture Store located in Sonora‚ Mexico. He chose this area because of its excellent supply of timber for the variety of tables and chairs produced by his company. Business was going well until the late 1990s’ when two events caused a decline in Guillermo’s business. First‚ a new overseas competitor
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Capital Budget Recommendation ACC/543 November 19‚ 2012 Fred Johnston Capital budget evaluation techniques are used to determine if cash inflows are enough to repay the company for the cost of assets‚ cost of financing the asset‚ and a rate of return that would compensate the company for any errors made during the estimation of cash flows (“Capital Budgeting Techniques”‚ n.d.). When using evaluation techniques it is best to use more than one perspective so as not to produce biased results
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This paperwork includes FIN 571 Week 6 Furniture Store Recommendation Cash Per Forma Resource: The Guillermo Furniture Store Scenario or your own organization‚ with the approval of your instructor‚ for this assignment Write a paper in no more than 2‚100 words that analyzes Guillermo’s alternatives and make a recommendation of a financial decision. The paper must also include a justification for your recommendation. Create a pro forma cash flow budget for the organization
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CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concept Questions 1. In this context‚ an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today‚ not‚ for example‚ what it cost to acquire. 2. a. Yes‚ the reduction in the sales of the company’s other products‚ referred to as erosion‚ should be treated as an incremental cash flow. These lost sales are included because
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2. The modified IRR (MIRR) method has wide appeal to professors‚ but most business executives prefer the NPV method to either the regular or modified IRR. a. True b. False 3. A firm should never undertake an investment if accepting the project would cause an increase in the firm’s cost of capital. a. True b. False 4. A decrease in the firm’s discount rate (r) will increase NPV‚ which could change the accept/reject decision for a potential project. However‚ such a change would have
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tax from their earning which is huge money but even after that‚ the company is making lots of profits. 2. The 15% discount rate to calculate NPV and the Cash Flows by using that discount rate ended up with a negative NPV of $ 2‚137‚217.21. That the discount rate of 15% was out dated and insufficient. The rate of 9.62% to compute and using this number to get the NPV of $746‚981.31. I would recommend Worldwide Paper Company to use the 9.62% discount rate‚ the returns will be great only if everything
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capital budgeting tools that financial managers and analysts use to evaluate the merits of an investment. Some of these techniques are quite intuitive and simple to use‚ such as payback analysis. Other techniques are a little more complex‚ such as the NPV and IRR approaches. In general‚ the more complex techniques provide more comprehensive evaluations‚ however‚ the simpler approaches often lead to the same value-maximizing decisions. Chapter 11 illustrates how to develop the capital budgeting cash flows
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is 12 %. First I would calculate the NPV and the IRR. If the NPV is higher then the return on the capital market‚ the project is profitable. The IRR shows me the discount rate that puts the NPV to zero. It could also be explained as the break-even point. Additionally the company could get a “Good As New” service contract for $500 a year. The machine would then produce cash flows of $4‚500 per year. I would again calculate the NPV with the new cash flow. If the NPV is higher then the return
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