(MBAZ505) The main purpose of investment is to maximize shareholders’ wealth by improving the value of the firm. Firms invest to replace existing equipment‚ for expansion‚ and for compliance with government regulations. There are three categories of investment decisions: acceptance or rejection‚ ranking of projects‚ and choosing between projects. To assess whether it is viable to invest or not the NPV technique can be used to compare the present value of returns and costs. If the NPV is negative it implies
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1. Using the company ’s cost of capital‚ the net present value (NPV) is the sum of the discounted cash flows minus the original investment. One of the major problems with Pan-Europa is their existing low stock price. In order to increase their value‚ they must take up projects that increase their stock values‚ including those that would allow them to increase gross sales that have been stagnant over the years. The values presented in Exhibit 3 allow us to compare these projects based on various factors
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budgeting functionality should answer two major questions. First is that‚ whether one particular project is a good one? Second‚ if we get more than one available project opportunities‚ but we should choose only one of them‚ which one should be that “one”? In real life we very frequently come across with question like whether to pick up a lump some payment of retirement account accumulated during years or receiving monthly retirement pensions until the rest of our life. In this case‚ NPV is the most appropriate
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When cash inflows are even: NPV = R × 1 − (1 + i)-n − Initial Investment i In the above formula‚ R is the net cash inflow expected to be received each period; i is the required rate of return per period; n are the number of periods during which the project is expected to operate and generate cash inflows. When cash inflows are uneven: NPV = R1 + R2 + R3 + ... − Initial Investment (1 + i)1 (1 + i)2 (1 + i)3 Where‚ i is the target rate of return per period;
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Pan Europa Foods * Question 1 * a. Strategically‚ what must Pan-Europa do to keep from becoming the victim of a hostile takeover? Answer: Pan Europa should not decrease the dividends of the shareholders to not devalue the stock price of the company. Instead should just decrease capital spending as what they board of directors have decided. In short‚ they should adopt strategies that should increase stock price not push it down to discourage buyout. b. What rows categories in Exhibit 2
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Value Net Present Value (NPV) is used in capital budgeting to analyze the profitability of an investment or project. NPV is found by subtracting the present value of the after-tax outflows from the present value of the after-tax inflows. Investments with a positive NPV increase shareholder value and those with a negative NPV reduce shareholder value. In order to compute the NPV for Worldwide Paper Company‚ we have to calculate the cash flow in capital budgeting of the project as below. | | 2007
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order to avoid takeover Pan-Europa should develop and maintain faith and loyalty of their customers towards products. Company should also satisfy its stakeholders by expansion and improvement in their market and product. At given time EPS and Shareholders’ Equity plays a vital role. Company should increase its market share by same “low price and high volume” and expand its production for more efficiency. Maarten Leyden from Production should be leading the way for Pan-Europa. Answer 3: Part 1 of
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Using this online NPV Calculation Tool http://finance.thinkanddone.com/online-n… we get the following NPV at 15% Net Cash Flows CF0 = -3000000 CF1 = 1100000 CF2 = 1450000 CF3 = 1300000 CF4 = 950000 Discounted Net Cash Flows DCF1 = 1100000/(1+0.15)^1 = 1100000/1.15 = 956521.74 DCF2 = 1450000/(1+0.15)^2 = 1450000/1.3225 = 1096408.32 DCF3 = 1300000/(1+0.15)^3 = 1300000/1.52087 = 854771.1 DCF4 = 950000/(1+0.15)^4 = 950000/1.74901 = 543165.58 NPV Calculation NPV = 956521
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For Project A‚ anything under 21.88% is acceptable and for Project B‚ anything under 20.62% is acceptable. The crossover rate‚ where the NPVs are the same is 8.16%. Project A Project B Required Return 8.25% Required Return 8.25% Cash Flows Period Cash Flows Cash Flows Period Cash Flows Initial Outlay -8‚500 0 -8‚500 Initial Outlay -9‚500 0 -9‚500 1 3‚600 1 3‚900 2 2‚400 2 2‚900 3 2‚850 3 2‚900 4 5‚200 4 5‚550 Discounted
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relevant risk and why? b) In the context of the Capital Asset Pricing Model how would you define beta? How are betas determined and where can they be obtained? limitations of betas? c) What information does beta give to a financial manager? What are the Which is often regarded QUESTION 2 a) What is the time value of money? flows? b) What factors need to be taken into account when choosing an appropriate discount rate? c) What do you understand by the terms (i) “net present value” (NPV) and (ii) “internal
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