were estimated regarding the construction of a new plant. Cost of plant 4‚000‚000 Annual cash inflows 4‚000‚000 Annual cash outflows 3‚600‚000 Estimated useful life 15 years Salvage value 2‚000‚000 Discount rate 11% Juan Optimist believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its own bikes the company will benefit from a “buy Filipino” patriotism that he believes is common among bikers. He also notes that the firms
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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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of cash flows rather than on net income? | | | | | |Cash flow rather than net income is used in capital budgeting analysis because the primary concern is with the amount| | |of actual dollars generated. For example‚ depreciation is subtracted out in arriving at net income‚ but this non-cash|
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capital budgeting issues‚ which include‚ among other things‚ the identification of relevant cash flows‚ the critical assessment of a capital-investment rating system‚ the classic “cross-over” problem in the project agree rankings based on the net present value (NPV) and internal rate of return (IRR). his is an analysis of the two discounted cash flows that will be used in summarizing the financial impact that this capital improvement to the polypropylene line will have on the Rotterdam business volume
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what the correct net cash flow for the second year would be if all expenses were as described but there was no depreciation costs. Here is what we know already: Year two Net Cash Flow with depreciation Expected annual sales of new product Expected annual costs of new product cash expenses depreciation expenses Income before taxes Income tax at marginal rate Net income Net annual cash flow for years shown 3‚170‚000 2‚400‚000 380‚000 390‚000 124‚800 265‚200 645‚200 2 Year two Net Cash Flow with
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The Net Present Value‚ Mergers and Acquisitions Michael D. Black Trident University Module 5 CASE Finance 501: Strategic Corporate Finance Professor: Walter Witham June 15‚ 2012 Net Present Value‚ Mergers and Acquisitions Abstract Financial managers must understand the value of dollars invested today in order to make decisions as to what capital ventures are worth pursuing for business growth. The money a business is willing to invest in new equipment or expansion
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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 any benefits that occur after the payback period‚ so it does not accurately measure profitability. The discounted payback period is also used to compute the time it takes to recover the cost of an investment‚ but it works to correct the disadvantage of the payback period by accounting for the time value of money. To calculate the discounted payback period‚ a discounted
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10 years Annual net cash inflow = $4‚000 Salvage Value = $0 Required rate of return = 16% Item Years Amount of cash flow 16% factor Present Value of Cash flow Annual net cash flow 1 to 10 $4‚000 4.833 $19‚332 Intial Investment Now $15‚000 1 $15‚000 Net Present Value (a-b) $4‚332 Project B Initial Cost = $15‚000 Life of the project = 10 years Cash inflow = $6000 (60‚000/10 years) Salvage Value = $0 Required rate
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CHAPTER 29 Capital Budgeting Meaning The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital expenditure may be : (1) Cost of mechanization‚ automation and replacement. (2) Cost of acquisition of fixed assets. e.g.‚ land‚ building and machinery etc. (3) Investment on research and development. (4) Cost of development and expansion of existing and new projects. DEFINITION OF CAPITAL
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are expected to result in additional cash flows to Rainbow of $5‚000 per year. Themachine costs $35‚000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A] Compute the payback‚ net present value (NPV)‚ and internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except the initial purchase) occur at the endof the year‚ and do not consider taxes. Rainbow Products is considering the purchase
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