building, facilities, equipment, vehicle fleets, and so on. Capital budgeting is important for the following reasons: 1. The size of the investments. As discussed throughout this book, the key function of a financial officer is to maximize the value of the company. Allocating large amounts of capital without proper investigation and analysis would expose the company to certain risks and may result in the devaluation of the company’s shares. 2. The length of the investment. In many long-term
Words: 2791 - Pages: 12
converting to what is not so familiar comes with challenges and fears of the unknown. Failure to explore this alternative could give competitors a comparative and absolute advantage. Finally, adding a product is also on the table of consideration. Guillermo’s patented product will add value, but the cost of doing so has to be
Words: 2210 - Pages: 9
ACCT505 Capital Budgeting problem Clark Paints Cost of new equipment $200,000 Expected life of equipment in years 5 Disposal value in 5 years $40,000 Initial working capital $0 Life production - number of cans 5,500,000 Annual production or purchase needs 1,100,000 Initial training costs 0 Number of workers needed 3 Annual hours to be worked per employee 2,000 Earnings per hour for
Words: 695 - Pages: 3
both companies, and thus is not open to negotiation. There are, however, a number of important unresolved issues including price, level of service, payment terms, and installation schedule. In the prior negotiation, the following proposal was on the table (though it was not formally accepted by either side): Nominal price: Service provision: Payment schedule: Delivery: $5,000,000 Standard Back-loaded installments Six months from date of contract signing. If Vericomp insisted, you would reluctantly
Words: 1372 - Pages: 6
analysis; the optimal weighted averages cost of capital, discuss the use of multiple valuation techniques in reducing risks and calculate the net present value of future cash flows for each of the alternatives. Guillermo Navallez was owner of Guillermo Furniture Store located in Sonora Mexico. Guillermo Furniture Store has been manufacturing handcrafted tables and chairs for a number of years. The company was operating at a profit due to inexpensive labor costs and “the area had a good supply of timber”
Words: 1299 - Pages: 6
CHAPTER 2 Present Values, The Objectives of the Firm, and Corporate Governance Answers to Practice Questions 1. The face value of the treasury security is $1,000. If this security earns 5%, then in one year we will receive $1,050. Thus: NPV = C0 + [C1/(1 + r)] = −$1000 + ($1050/1.05) = 0 This is not a surprising result because 5 percent is the opportunity cost of capital, i.e., 5 percent is the return available in the capital market. If any investment earns a rate of return equal to the opportunity
Words: 74775 - Pages: 300
Questions for Critical Thinking 7 Chapter 13: a. Discussion Questions: 13, 15, and 16. b. Problems: 4* and 6(a). * Remember the profit is 50% of sales. Use table 13-4 on p. 540 as an example to calculate the standard deviation for both projects, and then calculate the coefficient of variation to compare the risk of both projects, see pp. 542. Chapter 14: a. Discussion Questions: 2 and 11. b. Problems: 8*, 10**, and 12. * Remember the firm has a limited capital
Words: 2068 - Pages: 9
Mary Ho prepared this Case under the supervision of Prof. Su Han Chan and Prof. Ko Wang for class discussion. This Case is not intended to show effective or ineffective handling of decision or business processes. This case is part of a project funded by a teaching development grant from the University Grants Committee (UGC) of Hong Kong. © 2001 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means
Words: 1781 - Pages: 8
paper will present several alternatives Guillermo Furniture may use and will include a sensitivity analysis. Financial and valuation topics covered will include net present value (NPV) and weighted average cost of capital (WACC) and will discuss how these alternatives, or techniques, are used to reduce risk. Guillermo Navallez is the successful owner of Guillermo Furniture for many years now. Located in Sonora, Mexico, Guillermo's store is specialized in custom made chairs, tables, and many
Words: 1399 - Pages: 6
