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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existing doll line, Design Your Own Doll (DYOD). In order to correctly identify which project is more compelling and valuable, Harris needs to carefully evaluate the projects based on qualitative and quantitative metrics such as the NPV, payback period, IRR and how well each project is aligned with corporate goals and strategies. When comparing the value of two proposals within a division it is important to not only compare the net present value of the two, but to also consider how each project aligns
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Topic 9 The Purpose of this Topic * Remember, one of the two primary goals of the financial manager is to maximize owner wealth, and to do this the manager must identify and make long-term investments which produce a return equal to greater than the investments required rate of return. Thus, the purpose of this topic is to provide you with the knowledge and skills needed to identify, analyze and make capital or long-term investments (also known as Capital Budgeting) which are equal to or greater
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internal rate of return is the rate at which the present value of all future cash flow is equal to the initial investment. In ot The cost of capital is used in IRR analysis because the way in which the IRR relates to the cost of capital determines whether o If the IRR is greater than the cost of capital, then the project should be accepted If IRR is less than the cost of capital, the project should be rejected. reditors for using their funds. a capital investment. he total amount of discounted
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CASE STUDY The Investment Detective The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital budgeting analyst is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenges is knowing what quantitative analysis to generate in the first
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Case Study of Boeing's Decision to Develop the 777 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 777? 1a. which beta did you use? Why? 1b. if you used the CAPM, which risk premium and risk free rate did you use? Why? 1c. which capital-structure weights did you use? Why? Answer: i. Key Assumptions for the Calculation: In order to calculate the appropriate rate of return against which to evaluate the prospective cash flows
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produce the desired results, the sales and marketing might still improve and compensate. Market expansion towards eastward- The eastern market has a great appetite for frozen dairy products. Although competition from other manufactures exists, the IRR is 21%. With an initial investment of 20 million, the market has the potential to generate large revenue of 37.5 million over the years. Despite being a risky proposition, the returns from this project, if successful, are very lucrative. Strategic acquisitions-
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1. Incremental cash flows are ultimately the relevant cash flows to be used in project analysis. It is the difference between the cash flows the firm will have if it implements the project, and the cash flows the firm will have if it rejects the project. Although they are a cash expense, interest expenses are not included in project cash flows. We discount a projects cash flows by using its weighted average cost of capital (WACC), which already includes the cost of debt. Therefore, we do not include
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Tesca Works Successful research and capital are required to develop new products. A detailed analysis of the proposed refrigerator project will be thoroughly discussed in the following financial plan for the development and production of the refrigerator. You will find useful information for the cost of production, financing, warranty costs, and cost of capital. To begin, great consideration should be given to energy costs because it affects buyer power. Companies are subject to extensive state
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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
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