Road Kings Trucks Abstract This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the
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project with an initial cash outflow, flowed by a series of cash inflows (after tax), the NPV is given by:- For independent projects, the NPV decision rule is to accept projects with positive NPVs and to reject projects with negative NPVs. Simple Example Year 0 1 2 3 4 Project A (INR) -2000 1000 800 600 200 Project B (INR) -2000 200 600 800 1200 The Table shows the expected net after-tax cash flows of two projects, A and B. Discount Rate (Required rate of Return) = 10% NPV of A = -2000 + 1000/(1
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Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle Iwan Meier and Vefa Tarhan1 February 27, 2006 Abstract We survey a cross-section of 127 companies to shed light on various dimensions of the investment decisions. The questions posed by our survey examine the hurdle rates firms use, calculations of project related cashflows, the interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine
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capital for the analysis. Kimi’s assistant Joanna went ahead and chose to use one cost of capital for Nike. We agree with her decision because Nike’s different segments are all generally sports related and are susceptible to the same market risks. For example, Nike’s footwear and apparel lines, which make up a combined 92% of their revenue, are segments that complement each other and are sold through the same marketing and distribution channels. Non-Nike products made up only 4.5% of Nike’s revenue including
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To obtain a true NPV of a project, one must include the value of the interest tax shield. When the firm adjusts their debt annually to a target level, the tax shield is still discounted at rate rD respectively. This can also be used when the WACC process is utilized to determine the overall NPV of a project for a firm. Due to the fact that the firm
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possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs
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their strength. PPC’s management and board are weighing out two alternative approaches in order to determine a minimum rate of return. They had to decide if a single cutoff rate based on the company’s overall weighted average cost of capital (WACC) or a system of multiple cutoff rates that reflected the risk-profit characteristics of the several businesses or economic sectors in which the company’s subsidiaries operated would be the better alternative. Their basic capital budgeting approach
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equation: 1. Time-series: historic cost of capital 2. Compare with other firms (cross-section) Example 1 (Time-series) Firm A had a cost of long-term debt 2 years ago of 8%. Risk-free cost of long-term debt is 4%. Business risk premium is 2%, and financial risk premium is 2%. What is the cost of long-term capital of the firm when the current risk-free cost of long-term debt is 6%? Example 2 (Cross-section comparison) Firm B is in the same business and with a financial premium of 4%. The
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September 1997 Value/EBITDA Multiples: September 1997 600 500 400 300 200 100 0 Std. Dev = 14.65 Mean = 12 N = 3820.00 VEBITDA The Determinants of Value/EBITDA Multiples: Linkage to DCF Valuation l Firm value can be written as: FCFF1 V0 = WACC - g l The numerator can be written as follows: FCFF = EBIT (1-t) - (Cex - Depr) - ∆ Working Capital = (EBITDA - Depr) (1-t) - (Cex - Depr) - ∆ Working Capital = EBITDA (1-t) + Depr (t) - Cex - ∆ Working Capital From Firm Value to EBITDA Multiples
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How can their value be estimated? Answer: Assets-in-place are tangible, such as buildings, machines, inventory. Usually they are expected to grow. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations. c. What are growth options? How can their value be estimated? Answer: Growth options are not tangible. They include R&D, such as at drug companies and genetic engineering companies, and building customer relationships
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