StudyQRB/501April 8‚ 2014Capital Budgeting Case StudyThere are at least six capital budgeting tools a firm can use in analyzing a capital expenditure. They are: net present value (NPV)‚ internal rate of return (IRR)‚ profitability index (PI)‚ payback period (PB)‚ discounted payback period (DRP)‚ and modified internal rate of return (MIRR). This case study will focus mainly on NPV and IRR‚ in addition to the remaining four capital budgeting tools. Net Present Value (NPV) The NPV of an investment proposal
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($120‚000) $1‚000‚000 The staff costs can be assumed to be paid uniformly throughout the year. (a) Calculate the net present value for Project A and Project B using a risk discount rate of 10% per annum. Using net present value as a criterion‚ which project is preferable? (b) Find the internal rates of return for Project A and Project B‚ and hence determine which project is more favourable using this criterion. 1 Solution (a) For Project A‚ the net present value (in $000) is: NPVA
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chapter aims to give you some fi nance basics and their Excel implementation. If you have had a good introductory course in fi nance‚ this chapter is likely to be at best a refresher.1 This chapter covers • Net present value (NPV) • Internal rate of return (IRR) • Payment schedules and loan tables • Future value • Pension and accumulation problems • Continuously compounded interest Almost all fi nancial problems center on fi nding the value today of a series of cash receipts over time
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B) have different revenues values and expenses as well as variable depreciation expenses‚ tax rates and discount rates. The members of our team had to compute both corporate cases NVP‚ IRR‚ PI‚ Payback Period‚ DPP‚ and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project’s cost of capital and its risk is what’s needs to forecast the investment
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initially. The decision rule for the NPV as follows: invest if NPV> 0‚ do not invest if NPV< 0 Internal Rate of Return (IRR): calculates the interest rate that equates the present value of the future after-tax cash flows equal that investment outlay; then compared to the required rate of return‚ or hurdle rate‚ to determine the viability of the capital projects. The higher a project’s internal rate of return‚ the more desirable it is to undertake the project. Present Value Index (PVI) / Benefit-cost
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Capital Budgeting Techniques | | GLOSSARY Capital Budget: (1) The amount of money set aside for the purchase of fixed assets (e.g.‚ equipment‚ buildings‚ etc.). Also‚ (2) a request for authorization to purchase new fixed assets. Mutually Exclusive Proposals: Consideration of two or more assets that perform the same function. If one is chosen for purchase‚ the others are automatically rejected. Profitability Index: A ratio of the present value of the benefits (PVB) to the present value of the
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and 10 Months PI = PV/Cost= 1.51 Net Present Value $12‚730‚000.00 $11‚546‚000.00 Profitability Index 1.51 1.46 Internal Rate of return 27.27% 36.15% Modified Internal Rate of return 21.93% 20.96% Year Project B 0 (25‚000‚000.00) PBP DPBP Project A (IRR) Rate 10% 1 20‚000‚000.00 (5‚000‚000.00) 1 Year 0.909 18‚180‚000.00 (6‚820‚000.00) 1 Year Year Data Description 2 10‚000‚000.00 5‚000‚000
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of capital‚ while the IRR method assumes reinvestment at the IRR. b. The NPV method assumes that cash flows will be reinvested at the riskfree rate‚ while the IRR method assumes reinvestment at the IRR. c. The NPV method assumes that cash flows will be reinvested at the cost of capital‚ while the IRR method assumes reinvestment at the risk-free rate. d. The NPV method does not consider the inflation premium. e. The IRR method does not consider all relevant cash flows‚ particularly‚ cash flows
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design‚ high ethics‚ revealed limitations‚ adequate analysis‚ and justified conclusions (Cooper and Schindler‚ 2003). In this paper‚ the methods of net present value and internal rate of return are examined based on real-world capital budgeting decisions. This paper also gives insight on valuation techniques used to determine internal and external investment decision strategies and the risk associated with the investment decisions. In the Capital Budgeting Simulation‚ Silicon Arts Incorporated (SAI)
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Angus Cartwright Jr. Case Write Up Introduction It was 1995. Mr. Angus Cartwright‚ the financial advisor based in Arlington‚ Virginia had to make recommendations to his two clients: John DeRight and Judy DeRight‚ who both require 12% return on investment but different types of investment in their different life stages. The four properties that Cartwright was looking at are: 1) Alison Green‚ an existing garden apartment based in Montgomery County‚ Maryland; 2) 900 Stony building‚ an existing 5 story
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