techniques such as Accounting rate of return Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity These methods use the incremental cash flows from each potential investment‚ or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return‚ and "return on investment." Simplified and hybrid
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profitability index) or the return (the internal rate of return and modified internal rate of return). The evaluate cash flow using capital budgeting techniques are only estimates. The future is not known with certainty and neither is future cash flow. Therefore business should consider the degree of uncertainty into the decision making. This can be done by adjusting the discount rate associate with the project by the amount of risk. Specifically it should be adjust the discount rate for the amount of systematic
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1. | | | In actual practice‚ managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis. | | | Student Response | Value | A. | I and III only | | B. | II and III only | | C. | I‚ II‚ and IV
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Chap 22: 1‚ 2‚ 3‚ 4‚ 7‚ 10‚ and 11 1. You purchase machinery for $23‚958 that generates cash flow of $6‚000 for 5 years. What is the internal rate of return on the investment? $23‚958/$6000= 3.993 PVAIF (5 @ 3.993) = 8% 2. The cost of capital for a firm is 10%. The firm has 2 possible investments with the cash flows: Yr 1 A. $300 B. $200 Yr 2 A. $200 B. $200 Yr 3 A. $100 B. $200 A. Each investment costs $480. What investments should the firm make according to the present value?
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investments is to increase the value of the firm to the shareholders. Formal methods are used in capital budgeting‚ including the techniques such as- Payback Period Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself." All else being equal‚ shorter payback periods are preferable to longer payback periods. The payback
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Study: Assume Polaris invested $2.12 million to expand its manufacturing capacity. Assume that these projects have a ten-year life and that management requires a 10% internal rate of return on these assets. Ques 1. What is the amount of annual cash flows that Polaris must earn from these projects to have a 10% internal rate of return? Solution 1:Initial Investment=$2.12 million=$212000 Time Period (n) =10 years At IRR‚=10%‚Net Present Value of Investment=0 i.e. Present Value of 10 years Cash Flow-Initial
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future cash flows. Comparison to another rule‚ which is called the Internal rate of return‚ uses the discount rate that makes the NPV of an Investment zero. IRR finds the single rate that summaries the rate of return of a project. We only depend on cash flow of a particular investment not the rates offered elsewhere. For an example‚ you let your brother burrow 100 dollars but he pays you back 125 dollars. You would ask what is the return on this investment‚ which is 25% or 1.25 dollars back for every
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Accounting rate of return * Payback period * Net present value * Profitability index * Internal rate of return * Modified internal rate of return * Equivalent annuity * Real options valuation These methods use the incremental cash flows from each potential investment‚ or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return‚ and "return on investment
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back the mortgage to Collin Bank of Commerce and Bank of McKinney‚ and a $500k purchase of equipment. For all equity‚ the company will pay 2/3 of the cash flow in Year 7 to Comet Capital. Comet Capital is expected to earn a 25% before-tax internal rate of return. 2.) We will be able to calculate the net cash proceeds from the repurchased price of the real estate from Frank Thomas by setting NPV = 0 where NPV = PV (net cash proceeds from the repurchase price) + PV (Annual cash flows from the property)
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like the payback period‚ the DPP does not consider any cash flows after the initial investment is recouped. DPP still supports the decision of epoxy but has done little to combat the flaws found in the payback period. The average accounting return (AAR) takes the
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