College of Business Administration University of Pittsburgh Capital Budgeting: Investment Criteria BUSFIN 1030 Introduction to Finance Capital Budgeting Decisions Examples of decisions addressed: 1. What products should the firm sell? 2. In what markets should the firm compete? 3. What new products should the firm introduce? Roles of managers: 4. Identify and invest in products and business acquisitions that will maximize the current market value of equity
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FI515 Homework Week 5 10-8 NPV IRRs and MIRRs for independent Projects Using Excel NPV, IRR, and MIRR functions: r= | 14% | | | | | | | | cost of truck | (17,100) | | | | | | | | cost of pulley | (22,430) | | | | | | | | | | | | | | | | | NPV | year | truck | pulley | | IRR | year | Truck | Pulley | | 0 | (17,100) | (22,430) | | | 0 | (17,100) | (22,430) | | 1 | 5,100 | 7,500 | | | 1 | 5,100 | 7,500 | | 2 | 5,100 | 7,500 | | | 2
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low credit card rate they actually get a lot of customers who sign for the credit card since the interest rates are considerably low. What process would you use to estimate these discount rates to see if they are reasonable? - I would choose the IRR, NPV and the discount payback method to estimate 2. What is Targets Capital-budgeting process? -The Capital Expenditure committee said that the budgeting process would be to annually build 100 more stores while still maintaining an appealing image
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CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems 10. To find the future value with continuous compounding, we use the equation: FV = PVeRt a. b. c. d. FV = $1,000e.12(5) FV = $1,000e.10(3) FV = $1,000e.05(10) FV = $1,000e.07(8) = $1,822.12 = $1,349.86 = $1,648.72 = $1,750.67 23. We need to find the annuity payment in retirement. Our retirement savings ends at the same time the retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of
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Robinson Brothers Homes plan on cutting costs as the company faces the slowing down market and decreased profitability. 2) The second issue of the case is to evaluate what can be done to either decrease the required IRR benchmark related to this project or to increase the expected IRR of the project. Due to decreasing margins on their recent construction projects RBH needs a project to bring their revenues and profits up for the upcoming years. RBH’s Southern
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submitted. The proposals are: Match My Doll Clothing Line Expansion and Design Your Own Doll. A systematic process will be used to determine which proposal to recommend. Criteria Include: 1. Comparison of the business cases 2. NPV analysis 3. IRR and payback period analysis 4. Analysis of additional information 5. Recommendation Comparison of the Business Cases Most Compelling Business Case Match My Doll Clothing Line Expansion Match My Doll Clothing Line Expansion is the the most
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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 project, and discuss the conditions under which the IRR technique and the NPV technique produce different results. 6. Explain the benefits of a postaudit review of a capital project. I. Chapter Outline 10.1 An Introduction to Capital Budgeting A.
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NPV vs IRR NPV is Net Present Value is the present value of the future net cash flows from an investment project, and is one of the main ways to evaluate an investmentIRR - The Internal Rate of Return method is the process of applying a discount rate results in the present value of future net cash flows equal to zeros. NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return. The IRR and NPV rules can be used for
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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
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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 Cumulative cash flow
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