...you rank the projects simply by inspecting the cash flows? Analyzing the sum and the excess of cash flow can give the business an order of the most profitable investments; however it does not give the full details that are important to determining true profitability. As one can see from the charts, Project Number 3 has the highest sum of cash-flow benefits and excess of cash flow, but the payback is not accomplished until the 15th year. Other Projects may not have a high sum of cash-flow; however the initial payback happens very quickly which proves to be important when making these types of investments. The Net Present Value can not be figured from just inspecting the cash flows nor can any of the other procedures necessary to fully get the scope of the investment. It is important when making investments of this magnitude to evaluate all procedures available to decide upon the best one. 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the greatest...
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...rank the projects simply by inspecting the cash flows? Analyzing the sum and the excess of cash flow can give the business an order of the most profitable investments; however it does not give the full details that are important to determining true profitability. As one can see from the charts, Project Number 3 has the highest sum of cash-flow benefits and excess of cash flow, but the payback is not accomplished until the 15th year. Other Projects may not have a high sum of cash-flow; however the initial payback happens very quickly which proves to be important when making these types of investments. The Net Present Value can not be figured from just inspecting the cash flows nor can any of the other procedures necessary to fully get the scope of the investment. It is important when making investments of this magnitude to evaluate all procedures available to decide upon the best one. 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the...
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...identifying, analyzing, selecting, and implementing investment projects with returns that are expected to span over more than a year” (Okwuduche, 2010, pg. 1). The main objective is to select investments that will benefit the company. This student was informed by management that they are thinking about acquiring a corporation but do not want to spend more than $250,000. This student will analyze two different companies that cost $250,000 each to determine which company is the best investment. Overview of Net Present Value One method used to determine which corporation to acquire is the net present value (NPV). The NPV “of an investment proposal is equal to the present value of its annual free cash flows less the investment cash outflow to purchase the asset and put it in operating order” (Keown, 2014, pg. 310). In other words, it is the cash inflow that consists of “incremental revenues, reduction of costs, and release of working capital compared to the cash outflows that consists of the initial investment, repairs, maintenance, and operating costs of an asset” (Accounting For Management, 2012, pg. 1). If the NPV value is positive, the asset should be acquired. Overview of Internal Rate of Return Another method used to determine which corporation to acquire is the internal rate of return (IRR). The IRR is “the discount rate that equates the present value of the project free cash flows with the project initial cash outlay” (Keown, 2014, pg. 316). In other words,...
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...1. Discuss the importance of the eight items listed in the check list of operating budget in Exhibit 15-3 on page 184 from the textbook. 2. Compare and criticize capital budgeting methods? Which method do you recommend for use? Explain why? An operating budget consists of the known expenses, expected future costs, and forecasted income over the next year (Bradford, 2015). The eight items listed on the check list are important for managers to consider when reviewing an operating budget in order to properly evaluate the financial performance of the organization. There is not a single correct way to prepare an operating budget, and its development depends on several individual factors of the organization. For example, a static budget is based on a single level of operations and the budgeted expense amounts never change. Static budgets can be used to plan and set goals. A flexible budget projects expenses at various levels of activity, and is adjusted to the actually level of output reached during the period. Flexible budgets can be used to review previous performance of difference volumes. It is important that a manager is able to understand whether the budget is either static or flexible. If a cost is fixed, it does not change even if the volume changes. Variable costs increase or decrease proportionally to the volume change. A manager needs to know whether a budget’s costs are considered fixed or variable (Baker & Baker, 2014). Cash flow reporting is an important tool...
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...Accounting and Decision Making Techniques Assingment MFP/MBA April 2012 – July 2012 Semester By Pyae Thu Aung Student ID: B0340LSTH0412 Student Name: Pyae Thu Aung Student ID: B0340LSTH0412 Accounting and Decision Making Techniques Table of contents (a) Why is the investment appraisal process so important? ……….......................1 (b) What is the payback period of each project? If AP Ltd imposes a 3year maximum payback period which of these projects should be accepted? ………………………………………………….……..............1 (c) What are the criticisms of the payback period? ................................................2 (d) Determine the NPV for each of these projects? Should they be accepted? Explain why? ……………..…………...….…………………….…2 (e) Describe the logic behind the NPV approach?......……..……………………...3 (f) What would happen to the NPV if: (1) The cost of capital increased? (2) The cost of capital decreased? …………………………………………....3 (g) Determine the IRR for each project. Should they be accepted? ...…………...4 (h) How does a change in the cost of capital affect the project’s IRR? ………….6 (i) Why is the NPV method often regarded to be superior to the IRR method? …6 (j) References ……………………………………………………………….............7 Student Name: Pyae Thu Aung Student ID: B0340LSTH0412 Accounting and Decision Making Techniques (a) Why is the investment appraisal process so important? Decisions on investment, which take time to mature, have to be based on the returns that investment will make. If...
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...they are more space-saving than the semi-automatic ones. On the other hand they have to incur in more costs. (are more expensive) Will this investment be advantageous? Will this investment be worth the money spent? We are going to answer those questions and to present a suitable recommendation in consideration of every important aspect. 1- The case does not give details about pricing, sales or revenue. Is this a problem? The case does not give details about pricing, sales or revenue but that is not really a problem because it is not a matter of increasing sales but of producing more efficiently. Since the sales and revenues are the same for each project, it doesn't represent incremental cash flow to any of those projects. In fact, we need to consider the cash flows generated by each project when we're deciding which one is preferable. In our case, we have to choose between buying a...
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...Case 16: Capital Budgeting Too Hot To Handle! When Patsy opened her full service salon and day spa three years ago, she knew that she would have to make some difficult choices regarding the hiring and firing of qualified professionals such as cosmetologists, estheticians, nail technicians and massage therapists. However, she was confident that her salon management training at Chic University coupled with her industry experience as a stylist would serve her well. And serve her well they certainly did! Within three years of starting her own business, and after a few setbacks, she had managed to assemble a team of 10 salon professionals who were all extremely motivated, people-oriented, and driven individuals who worked hard at retaining their clients and drumming up retail sales. Of course, Patsy had put in place an incentive plan, which the stylists found to be challenging, yet lucrative. Patsy’s salon revenues had grown significantly each year to their current annual level of $500,000. On average, the salon serviced about 40 customers per day with an average ticket of $50. However, over the past year or so a number of new salons and nail spas had opened up in the city. Competition had become much more severe and customers were being swayed by numerous discount coupons. Patsy was well aware that her current sales growth rate of 10% would not continue for very long. At the suggestion of some of her regular clients, she decided to explore the possibility of expanding...
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...#Case 5 Victoria Chemicals Scheme analysis Since the Merseyside project is identified as belonging to the engineering-efficiency category, its capital-expenditure proposals are subject to meet at least three of four performance criteria: First, the contribution to net income from the project is positive. This criterion is measured as whether the average annual addition to earnings per share (EPS) is greater than zero. It is important because it somehow shows the profitability, and investors might regard it as an essential data. Second, the payback period is not more than six years. This criterion is defined as the number of years necessary for free cash flow of the project to amortize the initial project outlay completely. A short payback period is desirable, which means the costs are recovered fast, and thus the project is considered less risky and more favorable. It is easy to apply and understand, and useful to compare with other investment plans. Third, the net present value (NPV) of free cash flow is positive. This criterion is calculated as the present value of future cash flows of the project less the initial investment outlay. It is a determinant of whether to undertake the project. A project with a positive NPV is believed acceptable. The higher the NPV, the better the project. Also, it is a good method to evaluate the project because it takes all the relevant costs in account and gives explicit consideration to the time value of money. Fourth, the internal...
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...costs incremental to this investment. Discounted cash flow (DCF) analysis reveals that this investment project is attractive but that the benefits hinge on important assumptions about the plant’s business volume, the manager’s ability to lay off workers over the objections of a labor union, and the hurdle rate. The case may be used for the following: • Introduce students to mechanics of DCF analysis of go/no-go capital-investment decisions. • Consider the principle of incremental analysis as the foundation for identifying relevant cash flows for a project. • Explore the classic tradeoffs in capital-for-labor investment. • Review the analytical adjustments that are required to compare projects of unequal lives. Suggested Questions for Advance Assignment to Students 1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value (NPV) warrant the investment in the machine? 2. What uncertainties or qualitative considerations might influence your recommendation? How, if at all, would an inflation rate of 3% (or higher) affect the attractiveness of the Vulcan Mold-Maker? Please estimate the impact on NPV from a change in any of those elements. 3. Should Francesca Cerini proceed with the project? With novices, the instructor should skirt the unequal-lives aspect of the case, with the following...
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...Questions for Critical Thinking 7 Chapter 13: a. Discussion Questions: 13, 15, and 16. b. Problems: 4* and 6(a). * Remember the profit is 50% of sales. Use table 13-4 on p. 540 as an example to calculate the standard deviation for both projects, and then calculate the coefficient of variation to compare the risk of both projects, see pp. 542. Chapter 14: a. Discussion Questions: 2 and 11. b. Problems: 8*, 10**, and 12. * Remember the firm has a limited capital budget of $2.4 million for the coming year. In other words, the firm faces the capital rationing, see pp. 589-592. Use the profitability index as it s investment criterion. ** Please use the dividend valuation model, pp. 594-595. “A share of the common stock of the company currently sells for eight times current dividends.” Chapter 13 Discussion Questions #13 – Why does an importer usually face a foreign-exchange risk? How can the importer hedge the foreign-exchange risk by purchasing the foreign-currency today to have it by the time the foreign-currency payment is due? Why does hedging usually take place with forward contract? Investing in foreign securities gives rise to a foreign-exchange risk because the foreign currency can depreciate or decrease in value during the time of the investment (Salvatore, 2007, p. 562). Hedging refers to the covering of a foreign-exchange risk through a forward contract (Salvatore, 2007, p. 562). Salvatore (2007) describes forward...
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...Instructor Guide CORPORATE FINANCE COURSE NUMBER: MBA591 [pic] Jones International University®, Ltd. 1.800.811.JONES (5663) http://www.jonesinternational.edu ©2008 Jones International University®, Ltd. All rights reserved. 9697 East Mineral Avenue, Englewood, Colorado 80112, USA This workbook and all accompanying audio-visual material, manuals and software (collectively, the "Materials") are copyrighted with all rights reserved. Under the copyright laws, none of the Materials may be copied in whole or in part without prior written consent of Jones International University®, Ltd. (JIU™) You may permanently transfer all of your rights in the Materials, provided that you retain no copies, and provided that you transfer all of the Materials (including all component parts, media, documentation and any prior versions and upgrades). You may not copy or allow any copies of the Materials to be made for others, whether or not you charge anyone else for the copies. Limitation of Liability. JIU™ PROVIDES ALL OF THE MATERIALS “AS IS” WITHOUT WARRANTY OF ANY KIND. EACH OF JIU AND ALL ITS DEVELOPERS, TEACHING FACULTY, DIRECTORS, OFFICERS, EMPLOYEES OR AFFILIATES DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL JIU OR ITS DEVELOPERS, TEACHING...
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...Lecture Notes on Time Value of Money Stefan Arping Amsterdam Business School University of Amsterdam 1 Roadmap • compounding and discounting • annuities and perpetuities • growing annuities and perpetuities • net present value • internal rate of return • real world complexities 2 Compounding • suppose you invest $100 for four years at 10% interest • how does your investment evolve over time? beginning year balance year 1 year 2 year 3 year 4 100.00 110.00 121.00 133.10 interest 10.00 11.00 12.10 13.31 end year balance 110.00 121.00 133.10 146.41 =100 × (1 + 0.10) =100 × (1 + 0.10)2 =100 × (1 + 0.10)3 =100 × (1 + 0.10)4 • the future value (FV) of $100 invested for four years at 10% is 100 × (1 + 0.1)4 • general principles of compounding: – convert dollars today into dollars in N years: multiply with (1 + r)N – convert dollars in N years into dollars in N + m years: multiply with (1 + r)(N +m)−N = (1 + r)m 3 Discounting • conversely, the present value (PV) of $146.41 to be received in four years is 146.41 = 100 (1 + 0.10)4 • general principles of discounting: – convert dollars in N years into dollars today: divide by (1 + r)N – convert dollars in N + m years into dollars in N years: divide by (1 + r)(N +m)−N = (1 + r)m – PV of stream of future cash flows: convert all future cash flows into cash flows today and take sum • the PV of future cash flows is equivalent in value to the future cash flows in the sense that if you had the PV today you could transform...
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...Copyright : All rights reserved. No part of this course may be reproduced in any form by any means without prior permission in writing from: 0 BUSINESS FINANCE OUbs002223 January 2014 OUbs002223 Business Finance Table of Contents Unit 1 Agency Issue between shareholders and managers Unit 2 Investment appraisal methods Unit 3 Risks and Return Unit 4 Asset Pricing Models, CAPM & APT Unit 5 Capital Market Efficiency and Stock Market Anomalies Unit 6 Cost of Capital, Shareholder’s wealth, Gearing & Leasing Unit 7 The dividend decision Unit 8 Corporate Restructuring 1 Aim of the Module To provide learners with knowledge of the principles and practice of the financing decisions of enterprises. Learners will learn about the decisions which firms make about financing their investments in productive capital. Teaching and learning strategy The teaching and learning strategy is designed to develop in students an ability to understand the mechanisms of financial markets and the issues pertaining to investment decision in those markets. Students should be able to understand and apply the time value concepts with regards to investment decision. They should also be able to evaluate the risks and returns of financial instruments. Assessment Strategy Unit(s) of Assessment Assignment WrittenExamination Weighting Towards Module Mark (%) 30 70 GUIDELINES FOR SELFSTUDY ...
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...ION JONATHAN BERK STANFORD UNIVERSITY PETER D E MARZO STANFORD UNIVERSITY Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo To Rebecca, Natasha, and Hannah, for the love and for being there —J. B. To Kaui, Pono, Koa, and Kai, for all the love and laughter —P. D. Editor in Chief: Donna Battista Acquisitions Editor: Katie Rowland Executive Development Editor: Rebecca Ferris-Caruso Editorial Project Manager: Emily Biberger Managing Editor: Jeff Holcomb Senior Production Project Manager: Nancy Freihofer Senior Manufacturing Buyer: Carol Melville Cover Designer: Jonathan Boylan Cover Photo: Nikreates/Alamy Media Director: Susan Schoenberg Content Lead, MyFinanceLab: Miguel Leonarte Executive Media Producer: Melissa Honig Project Management and Text Design: Gillian Hall, The Aardvark Group Composition and Artwork: Laserwords Printer/Binder: R.R. Donnelley/Jefferson City Cover Printer: Lehigh Phoenix Text Font: Adobe Garamond Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text and on this copyright page. Credits: Cover: Sculpture in photo: Detail of Flamingo (1973), Alexander Calder. Installed in Federal Plaza, Chicago. Sheet metal and paint, 1615.4 x 1828.8 x 731.5 cm. Copyright © 2013 Calder Foundation...
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...goal scorer, either to build a new stadium having 60,000 seats capacity with an external financing, signing of new top scorer, playing in newly built stadium. Under the first alternative solution, the Net Present Value for Tottenham Hotspur plc, during the last 13 year forecasted period, was calculated and found to be £67.68M. This calculation will encourage the stakeholders to keep the current stadium in use. While the company has a high operating current cost with Net Income coming to about 2% of total revenues. If Tottenham Hotspur follows the second alternative, The NPV is estimated at £27.51M and using the third alternative shows the most favorable value of £82.32M. So the option of stadium and player will increase substantially from 2010 onward, only if the growing rates apply. Further analysis has been performed in order to find out the financial position of the company. When compared with the top eight teams of the...
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