08 6.3 – 1. 5% + 7% = 12% 2. 5%*1= 5, 5 + 12 = 16.9% What is an "opportunity cost rate" and how is this rate used in discounted cash flow analysis? What is an opportunity cost rate? “The opportunity cost rate is the rate of return available on the best alternative investment of similar risk” (Brigham & Ehrhardt, 2014). How is this rate used in discounted cash flow analysis? The opportunity cost rate is the value of "i" in the time value of money equation References Brigham, E
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in account/nor does it take take cash flows after payback period * Discount method does take time value of money in account but still does not take cash flow * IRR not as good NPV-discount rate that drives NPV to 0 * Changed weighted avg. of capital it does not change IRR * Critisim of IRR same internal rate of return assums cash flows will be reinvested-unrealistic * Can get more than 1 IRR-if more than one change * NPV sum of cash flows if positive-give it a green light
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(discount cash flow) and cost of capital • When you use the after-tax cost of capital to be the discount rate, you basically take in the effect of the financing. • If you discount the project cash flows (without financing) by the after-tax cost of capital, you will get the exact net present value as you use it to discount the total cash flows (project cash flows plus the financing cash flows). • That is, when you use the after-tax cost of capital to discount financing related cash flows, the net
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budgeting technique would be required for all major projects? Why? Why not the others? 1. Net Present Value (NPV) 2. Internal Rate of Return (IRR) 3. Modified Internal Rate of Return (MIRR) 4. Profitability Index (PI) 5. Regular Payback 6. Discounted Payback As NPV is the best criterion due to being directly related to maximizing my stock’s intrinsic value, I would choose this technique. As maximizing stock increases intrinsic value and thus increases the value of my company, staying focused
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Case 3. (a) Compute the projected annual cash flow in dollars. (b) Compute the projected operating gains/losses over the four-year horizon as the discounted present value of change in cash flows, which is due to the pound depreciation, from the benchmark case presented in Exhibit 9.6. (c) What actions, if any, can Albion take to mitigate the projected operating losses due to the pound depreciation? a) The projected annual cash flow can be computed as follows: _____
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Liberty Medical Group Balance Sheet - Two-Year Comparison Transaction | Year 2008 (£) | Year 2007 (£) | Cash and equivalents | 336,818 | 319,978 | Trade account receivable | 134569 | 127841 | Inventory | 12985 | 13657 | Other current assets | 98323 | 94325 | Total Current Assets | 582695 | 555801 | Long term investment | 81197 | 77137 | Net fixed
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which would be the better company to acquire based on income statement and cash flow projections, Net present value (NPV), and Internal rate of return (IRR). This paper will go over the reasoning for the final decision based on the analysis of the projections as well as the importance and differences of NPV and IRR. Net Present Value (NPV) The NPV is the difference of the discounted cash inflows and the discounted cash outflows. The NPV is important as it does a comparison of the present value
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Calculate Profitability Index given relevant information. Chapter 9: Using Discounted Cash-flow analysis to make investment decision 1. State why Accounting Incomes differ from Cash flows. 2. State the six factors to be considered for estimating cash flows of a project. 3. Calculate change in working capital for each period over the lifetime of a project. 4. Calculate the incremental operating cash flows for each period over the lifetime of a project. 5. What is sunk cost? Give
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College of Business and Finance The MBA Program Financial Management (FINC 501) 1st Semester (2012/2013) Final Exam Instructor: Dr. Wajeeh Elali Date: December 13, 2012 Time: 6:00pm -8:00pm |Student Name: | |Student ID: | ***Suggested Solutions*** INSTRUCTIONS: □ This is a CLOSED BOOK examination.
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WEEK 2 NPV, PBP, IRR, EAC( equivalent annual cash flow) NPV: If NPV>0, accept the project [which are expected to add value to the firm], otherwise don’t bother. Reminders Rule 1: Only cash flow is relevant Cash flow ≠ accounting income •In an income statement, profit is shown as it is earned rather than when the company and its customers get around to paying their bills. •Cash outflows are sorted into two categories: 1) current expenses, deducted when calculating income; and 2)
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