the present value of the cash inflows. 4. Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life. 5. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV. 6. A capital
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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 go with it /Negative you should not do it * Is IRR-greater is what you want * NNR adjusted cash flow were
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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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TARGET CORPORATION Executive Summary Target Corporation is the second largest retailer in the U.S. with over 1700 Target and Super Target stores. Targets around the country offer everything from household essentials to computer software to groceries, and sell many of their products under private label brands. In addition to their retail segment, the company also offers credit and debit cards to its frequent shoppers. In 2002 the Minneapolis-based Target Corporation became the United States
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ANALYSIS AND LOCKHEED TRI STAR INVESTMENT ANALYSIS QUESTION 1: A) Payback, NPV, IRR: (35,000) 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 1 (35,000) 2 3 4 5 6 7 8 5,000 5,000 5,000 5,000 5,000 5,000 5,000 9 Machine Cost Duration (years) Cash Flows Cost of capital Payback (years) 35000 15 5000 12% total cost annual cash flow 10 11 12 13 14 15 7 NPV IRR present value of cash inflows - present value of cash outflows 3.07% ($9
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CHAPTER 6 Why Net Present Value Leads to Better Investment Decisions than Other Criteria Answers to Practice Questions 8. a. [pic] [pic] [pic] b. Payback A = 1 year Payback B = 2 years Payback C = 4 years c. A and B d. [pic] The present value of the cash inflows for Project A never recovers the initial outlay for the project, which is always the case for a negative NPV project. The present
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[pic] SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT AFIN 209 - CORPORATE FINANCE AND FINACIAL MODELLING MID TERM EXAMINATION SEPTEMBER 2012 Time allowed: 3 HOURS plus 5minutes reading time Instructions to Candidates: 1. Check that you have the correct examination in front of you. 2. There are SIX (6) questions in this paper. Answer FOUR (4) questions. 3. All questions must be answered on the answer sheet only. 4. Begin each question on a new page. 5.
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whether or not to grant final approval to proceed with the project. Although significant investments are required to develop the Boeing 7E7, a competitive advantage cannot be achieved with the Company’s current product scope. Therefore, due to the IRR being higher than the commercial segment’s WACC as well as the need to achieve a competitive advantage in the market, we believe the project should be undertaken. #18 and The Force Executive Summary Due to the above quantitative analysis, it
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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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AC505 - Capital Budgeting Problem Data: Cost of new equipment Expected life of equipment in years Disposal value in 5 years Life production - number of cans Annual production or purchase needs Initial training costs Number of workers needed Annual hours to be worked per employee Earnings per hour for employees Annual health benefits per employee Other annual benefits per employee-% of wages Cost of raw materials per can Other variable production costs per can Costs to purchase cans - per can Required
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