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 Investment=0 Initial Investment =Present Value of 10 year Cash Flow We will get Present value of 10 year equal cash flow(CF) using annuity formula
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as follows: [pic] The Equity-Beta is a function of the risk of a firm’s assets (operating risk) and the amount of financial leverage. [pic] An Asset-Beta (= unlevered Beta) reflects a firm’s operating risks without the effects of leverage. The Debt-Beta is the covariance of a firm’s debt with the market. A relevered Beta is the Equity-Beta of a firm with a new capital structure‚ underlying the old Asset-Beta. 1.3 Betas Investment Grade (>= BBB) [pic] [pic] Debt-Beta
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Net Present Value (NPV) Net present value is the present value of net cash inflows generated by a project including salvage value‚ if any‚ less the initial investment on the project. It is one of the most reliable measures used in capital budgeting because it accounts for time value of money by using discounted cash inflows. Before calculating NPV‚ a target rate of return is set which is used to discount the net cash inflows from a project. Net cash inflow equals total cash inflow during
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8 : 1 to 23 Chapter 9 : 1 to 24 1. NET PRESENT VALUE A. The Basic Idea Net present value—the difference between the market value of an investment and its cost. While estimating cost is usually straightforward‚ finding the market value of assets can be tricky. The principle is to find the market price of comparables or substitutes. Perspectives: Using the text example (page 257)‚ the basic idea behind capital budgeting is to ‘add value’. After including all of the costs (cash
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KK INDUSTRIES FEASIBILITY STUDY A STUDY TO ASSESS THE FINANCIAL FEASIBILITY OF SETTING UP A PLASTIC FOOD CONTAINER PLANT BY KK INDUSTRIES‚ BANGALORE SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF BACHELOR OF BUSINESS MANAGEMENT DEGREE COURSE OF BANGALORE UNIVERSITY By M R KAUSHIK Reg. No. 08KXC08077 Under The Guidance of Mrs. Mini K Abraham HOD – COMMERCE SURANA COLLEGE OF ARTS‚ SCIENCE‚ COMMERCE AND MANAGEMENT South End Road Bangalore – 560004 2010 – 11 SURANA COLLEGE 1
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return. The 60% bond option had earnings per common stock share at .160. The $43‚200 interest on bonds could have affected the earnings total. The income before tax and the tax income was a contributing factor to lower figures and results in the net income category. A2. Competition Bikes needs to analyze their capital budgeting. Businesses should acquire investments that are going to bring in more revenue but they have to make sure for the long term the investment
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A. $5‚684.22; reject B. $7‚264.95; accept C. $7‚264.95; reject D. $9‚616.93; accept E. $9‚616.93; reject AACSB: Analytic Bloom’s: Application Difficulty: Basic Learning Objective: 9‐1 Section: 9.1 Topic: Net present value 3. A firm evaluates all of its projects by applying the IRR rule. The required return for the following project is 21 percent. The IRR is _____ percent and the firm should ______ the project. A. 23.67 percent; reject
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Making the Investment Decision Mr. Bill Sipple (HVS Capital) Post Session Assignment 1. What are the three main approaches to value and the pros/cons of each? The three main approaches to value are the income approach‚ which is widely used in the hotel valuation process‚ the sales comparison approach‚ and the cost approach. The income approach deals with either a Cap Rate or discounted cash flows. This approach is the preferred approach to valuation as it most closely reflects the economic
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Capital Budgeting Introduction Capital budgeting decisions are the most important investment decisions made by management. The objective of these decisions is to select investments in real assets that will increase the value of the firm. (Kidwell and Parrino‚ 2009) Project Classification Types * Replacement projects are expenditures necessary to replace worn-out or damaged equipment. * Cost reduction projects include expenditures to replace serviceable but obsolete plant and equipment
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02/2014 FOR THE SECOND SEMESTER QUESTION 1 (a) Determining value of company using the fair rate of return provided YEAR 2014 2015 2016 2017 (P0) (P1) (P2) (P3) (P4) Rand Rand Rand Rand Rand Expected dividend to be paid 2014 550 000 x 1‚10 2015 605 000 x 1‚15 2016 695 750 x 1‚20 2017 834 900 x 1‚25 605 000 695 750 834 900 1 043 625 Gordon’s dividend growth model 2018 and onward 43 484 375 0 Fair rate return Net value 605 000 695 750 834 900 44 528 000 0‚781 0‚610 0
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