survive (Guillermo Furniture Store Scenario, 2011). This paper will contain a discussion of the weighted average cost of capital (WACC), background on the use of multiple valuation techniques in reducing risks, a discussion on the net present value (NPV) of future cash flows for different alternative methods, and a sensitivity analysis. Guillermo Alternatives The financial downturn of Guillermo Furniture resulting from developments in the industry has caused a need for alternatives to be evaluated
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present value (NPV) method to analyze capital expenditure decisions, and be able to calculate the NPV for a capital project. 3. Describe the strengths and weaknesses of the payback period as a capital expenditure decision-making tool, and be able to compute the payback period for a capital project. 4. Explain why the accounting rate of return (ARR) is not recommended for use as a capital expenditure decision-making tool. 5. Be able to compute the internal rate of return (IRR) for a capital
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will purchase. According to the text, the NPV is superior in comparison to the IRR. “One disadvantage of the IRR relative to the NPV deals with the implied reinvestment rate assumptions made by these two methods. The NPV assumes that cash flows over the life of the project are reinvested back in projects that earn the required rate of return. The use of the IRR, however, implies that cash flows over the life of the project can be reinvested at the IRR.”
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calculator inputs and the result. 1. A project has the following cash flows C0 C1 C2 C3 ($700) $200 $500 $244 a. What is the project’s payback period? b. Calculate the projects NPV at 12%. c. Calculate the project’s IRR SOLUTION: a. The cumulative cash flow is Year 0 1 2 3 Cash Flow ($700) $200 $500 $244 Cumulative ($700) ($500) 0 $244
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WHAT IS CAPITAL BUDGETING? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting. I. CAPITAL
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Discuss the NPV decision rule, and how it relates to the goal of maximizing shareholders’ wealth. To make sensible investment decisions, a good financial analyst should use a method that considers all of the costs and benefits of each investment opportunity, and makes a logical allowance for the timing of those costs and benefits. The net present value (NPV) method provides for these investment assessment criteria. The NPV is a financial valuation concept that is essential to all financial modeling
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Mathematical Techniques for Economists 112ECN INVESTMENT APPRAISAL USING A SPREADSHEET As the mathematics involved in calculating the NPV of a project can be quite time consuming, a spreadsheet program can be a great help. Although Excel has a built in NPV formula, this does not take the initial outlay into account and so care has to be taken when using it. Example An investment requires an initial outlay of £25,000 with the following expected returns: £5,000 at the end of year 1 £6,000 at the
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Julianne Manchester NPV The NPV method of capital budgeting dictates that all independent projects that have positive NPV should be accepted. The rationale behind that assertion arises from the idea that all such projects add wealth, and that should be the overall goal of the manager in all respects. If strictly using the NPV method to evaluate two mutually exclusive projects, you would want to accept the project that adds the most value (such as the project with the higher NPV). Therefore, if considering
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COC=12%, A. NPV=-945.6776,IRR=11.4913%,Payback period=7 yrs. Rainbow should not have purchased it. B. Per year additional income=4500-500=4000 per year. Initial investment=35000, COC=12% NPV=-35000+ 4000/0.12=-1666.667. No it should not purchase it. C. Growth rate= 0.04,Coc=0.12, NPV=-35000+5000/(0.12-0.04)=27500 2. A. Cf0=-75k,Cf1 to CF3=44k,coc=15% NPV=25,462,IRR=34.61%. B. B. Cf0=-50k,Cf1 to CF3=23k,coc=15% NPV=2,514,IRR=18.0103%. C. Cf0=-125k,Cf1 to CF3=70k,coc=15% NPV=34,825,IRR=31.21%. D. CF0=-1K
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MBA FOUNDATION PROGRAMME – ADMT ASSIGNMENT Question A Yes, because all entities would find it difficult to survive if they did not invest in some form of capital expenditure from time to time and they certainly would not be able to grow and to develop. In capital investment appraisal it is the role of directing attention which is important. Investment appraisal will add value to the business entity because it assists management decision making by providing information on the investment in a project
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