advantages of using the payback period calculation. It is very simple to calculate‚ and it is a good measure of risk in a project. As stated before‚ the longer it will take to return the money on the project the riskier it is. Also‚ for companies that have liquidity problems‚ it provides a good resource on what investments will return money the quickest. A big disadvantage of the payback period is that it does not take into account the time value of money which can lead to wrong decisions. It also ignores
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new trending project to their project line. The project would only be in production for five years and the company has chosen team A to make an educated recommendation. Tem A will analyze the following: • Cash flow • Net present value • Internal rate or return The following analysis is provided to aid in the understanding of Team A’s final recommendation: Free Cash Flows The focus of what Caledonia receives is the free cash flow. The company should focus on what is received and what can
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the relationship between the net present value and the internal rate of return for the two corporations that are analyzed. Capital Budgeting Case A company is planning in acquiring a new corporation and there are two options with the same cost of $250‚000 but both with different 5-year projections of cash flows. The evaluation done to the two corporations (A and B) is based on the Net Present Value (NPV) and the Internal Rate of Return (IRR). The net present value represents the value
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Capital Budgeting QRB/501 July 25‚ 2013 On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would
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the project was 3.10 years‚ when considering the erosion of Rotterdam‚ this would increase to 3.46 years2. The net present value of Merseyside is £15.61 million and when considering erosion‚ the net present value is £11.37 million2. The internal rate of return is 33%‚ with the erosion‚ it is 28.2%2. Based on these four criteria‚ Merseyside is a valid project to consider. When considering the Rotterdam project‚ the effect on earnings per share was £6‚000 with an average addition of £2‚100 per
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cash outflow used for capital investment by an excess of the desired rate of return. Management “wants to know the rate of return to expect from investing”‚ therefore‚ will “use the internal rate of return method.” (Edmonds‚ Edmonds‚ Olds‚ McNair‚ & Schnieder‚ p.1156) The internal rate of return produces the actual rate of return on an investment; where as‚ net present value allows management to select the desired rate of return on an investment. A simple and straightforward technique is the payback
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the weight of each component as a percent of total capital‚ and “t” representing the marginal corporate tax rate. When calculating the WACC‚ there are certain methods and difficulties that are worth noting. First‚ the costs should always be current and comparable to the investors’ internal rate of return on future cash flows. Second‚ the weights used should always be the current market rates‚ which studies found is the popular practice for most firms. Third‚ the
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you provided into several useful and easy to read charts‚ diagrams‚ and explanations. In this memorandum you will find a summary of breakeven points using discount rates of 8‚ 10‚ 12‚ 14‚ and 16 percent‚ a breakeven chart comparing the net present value of all benefits to the net present value of all costs‚ and the internal rate of return. I also provide analysis of a couple of different scenarios‚ for example‚ a scenario summarizing the elimination of a staff position‚ and another scenario summarizing
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earn the required rate of return. B. produce the required net income. C. produce a yield equal to or greater than the market rate on similar investments. D. have a cash inflow‚ rather than an outflow‚ for the year. E. recover the investment ’s initial cost. 3. The discount rate that causes the net present value of a project to equal zero is called the: A. yield to maturity. B. required return. C. market rate. D. internal rate of return. E. average accounting return. 4. The net present
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11% Common Stock (Internal Only) 55% 15% The company’s marginal tax rate is 40%. a. 13.3% b. 7.1% c. 10.6% d. 10% 2. In general‚ the most expensive source of capital is: a. preferred stock b. new common stock c. debt d. retained earnings 3. Sonderson Corporation is undertaking a capital budgeting analysis. The firm’s beta is 1.5. The rate on 6 month t-bills is 5%‚ and the return on the S&P 500 index is 12%
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