firm’s future. The difference between capital budgeting and individual’s investment decisions are in the estimation of cash flows, risk, and determination of the appropriate discount. B - The difference between interdependent and mutually exclusive projects is that the independent project’s cash flows...
single undertaking or project being considered as an investment possibility. There are two kinds of proposals: Independent proposals: Even though few proposals in a firm are truly independent, for practical purposes it is common to assume that certain proposals are independent. Usually, if proposals...
NPV > 0 and/or IRR > WACC. 10-3 What is the difference between independent and mutually exclusive projects? Independent projects – if the cash flows of one are unaffected by the acceptance of the other. Mutually exclusive projects – if the cash flows of one can be adversely impacted...
handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its...
Capital Budgeting What are the characteristics of mutually exclusive capital budgeting projects that may cause the net present value and internal rate of return methods to rank the projects differently? How would this difference impact your recommendations and/or decision-making process within your...
*capital budgeting? “Simply put, capital budgeting is the whole process of analyzing projects and deciding which ones to include in the capital budget” (Page 344). The five key methods used to evaluate projects for capital budgeting include: (1) payback period, (2) discounted payback period, (3) net...
Question a What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions? Capital budgeting is the process of analyzing potential additions to fixed assets. Capital budgeting is very important to firm’s future because of...
Budgeting 1. What is the difference between independent and mutually exclusive projects? An independent project is one in which accepting or rejecting one project does not affect the acceptance or rejection of other projects under consideration. Therefore, no relationship exists between the cash flows of...
5 or 6 years, then positive cash flows for the following 20 years. Given their forecasted cash flows, both managements decided that taking on the projects would increase their company’s intrinsic value. Because the planes will compete with one another, either Boeing’s or Airbus’s forecast is probably...
determine whether to accept a project or not.Net Present Value (NPV)Net present value is the difference between the present value of cash inflows and the present value of cash outflows. It is used in capital budgeting to analyze the profitability of an investment or project. NPV= sum[CFt/(1+r)t]-C0 ...
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, compare, and select projects is needed. This procedure is called capital budgeting. In other words, capital budgeting is the...
investments of mutually exclusive projects. 7 If all projects are mutually exclusive If NPV is positive, the project should be accepted. The projects have to be mutually exclusive to accept NPV. earlier, if the NPV is negative, the projected cash flows will not cover costs and thus, the project should be...
B) Answer: Projects are independent if the cash flows of one are not affected by the acceptance of the other. On the other hand, two projects are mutually exclusive if acceptance of one impacts adversely the cash flows of the other; that is, at most one of two or more such projects may be accepted...
important, and state how project proposals are generally classified. • List the steps involved in evaluating a capital budgeting project. • Calculate payback period, discounted payback period, Net Present Value (NPV), and Internal Rate of Return (IRR) for a given project and evaluate each method...
budgeting is the decision process that managers use to identify those projects that add value to the firm’s value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is •...
ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 10 10-1 Project classification schemes can be used to indicate how much analysis is required to evaluate a given project, the level of the executive who must approve the project, and the cost of capital that should be used to calculate the project’s NPV...
from investors, so they are not included in the calculation of the cost of capital. We adjust for these items when calculating the cash flows of a project, but not when calculating the cost of capital. WACC Estimates for Some Large U. S. Corporations Company WACC Intel (INTC) 16.0 Dell Computer (DELL)...
Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best...
management the WACC is used primarily to make investment decisions and these decisions hinge on projects expected future returns versus the cost of new or marginal capital that will be used to finance these projects. Thus the relevant cost it marginal cost of new debt to be raised during the planning period ...
flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow...