valuation method for the project is forecasting the future free cash flows generated from the project and calculating its net present value (NPV). This project has a positive NPV of $936,147, and an internal rate of return (IRR) at 11.44% which is larger than the company’s weighted average cost of capital (WACC) at 9.85%. Consequently, the investment is expected to be able to maximize shareholders’ wealth by generating positive future cash flows. The WACC of the company is estimated based on its cost
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per share, (2) its payback period, (3) net present value of free cash flow and (4) internal rate of return. The firm uses such a complicated scheme to evaluate capital-expenditure proposals because: (1) Impact on earnings per share evaluates how the project is going to affect shareholders’ wealth of the company. (2) Payback period evaluates how long the project is going to take to reach break-even point. (3) NPV of free cash flow evaluates the dollar contribution of the project to shareholders
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acquire Mercury Athletic Footwear, the results of the financial analysis below indicate Active Gear should proceed with the acquisition. Based on the Free Cash Flow Method, considering the financial projections and assumptions for Mercury Athletic, indicate the acquisition has a positive net present value of $112,778,000 [Present Value of Future Cash Flows (59,440,000) + Terminal Value ($276,921,000) – Purchase Price ($223,583,000)]. There are also possible synergies that could make the project even more
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capital” position of the firm. Explain what negative working capital means (we discussed in the context of the Amazon.com case). Negative working capital happens because customers pay upfront and so rapidly, the business has no problems raising cash. A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable. In the business model of RightNow, it sold directly to consumer businesses a subscription to their software service, this makes
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ROHANI MD. RUS PREPARE BY: WONG LI WEN 220957 NOOR NAILAH BINTI KAMARUDDIN 222016 KHAIRUNNISA BT AHMAD DAMANHURI 222411 Table of Contents What is the basic nature of the problem in this case? 1 Base-case Units Assumptions 3 Cash Flow- License 5 Working Capital - Own 6 Working Capital - License 6 Incremental NPV and IRR Sensitivity to Total Units Sold 7 What do the result of the foregoing DCF analysis suggest? 8 Are there qualitative issues that we should address, but
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Corporate Finance: Theory & Practice 25557 Assignment 1) What are the appropriate costs of capital for the GPS transmitter and surveillance aircraft projects? The cost of capital is used to discount the expected cash flow of a proposed project to its present value to make an evaluation of whether to proceed or drop out the project. Normally, a company cost of capital or WACC is used as the discount rate for projects. However, as WACC represents the average rate of return demanded by investors in
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It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and comparable transaction multiples. Discounted-Cash-Flow Method Overview tC The DCF approach in an M&A setting attempts to determine the enterprise value or value of the company, by computing the present value of cash flows over the life of the company.1 Because a corporation
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project free cash flow versus accounting profits, incremental cash flows, net present value, and internal rate of return. Caledonia Products is deciding whether to undertake a new investment project. The firm must determine the cash flows for the life of the project, calculate the net present value and the internal rate of return, and decide whether the project is a sound investment. Caledonia must focus on free cash flow somewhat than accounting earnings because the free cash flow profits the
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results from change in the financial integrity of the investment. b. Default risk 10. _________ measure the systematic risk of a security that cannot be avoided through diversification. a. Beta Part Two: 1. What is Annuity kind of cash flow? Ans : A series of payments of an equal amount at fixed, equal intervals for a specified number of periods. Annuity is fixed sum of money paid every year in at any other fixed interval shorter than a year. This annuity may be by way of return
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uncertainty in the financial markets. In July 2000, Reed Hastings, CEO of NetFlix, needed to decide whether the compnay should proceed with the IPO or withdraw it. Investment banks predicted that the IPO of NetFlix would succeed if it showed positive cash flows within a twelve-month horizon, but the executives at NetFlix were unsure whether they could achieve that goal. Long-Run Objectives & Performance To Date NetFlix’s long-run objectives are to
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