COC=12%, A. NPV=-945.6776,IRR=11.4913%,Payback period=7 yrs. Rainbow should not have purchased it. B. Per year additional income=4500-500=4000 per year. Initial investment=35000, COC=12% NPV=-35000+ 4000/0.12=-1666.667. No it should not purchase it. C. Growth rate= 0.04,Coc=0.12, NPV=-35000+5000/(0.12-0.04)=27500 2. A. Cf0=-75k,Cf1 to CF3=44k,coc=15% NPV=25,462,IRR=34.61%. B. B. Cf0=-50k,Cf1 to CF3=23k,coc=15% NPV=2,514,IRR=18.0103%. C. Cf0=-125k,Cf1 to CF3=70k,coc=15% NPV=34,825,IRR=31.21%. D. CF0=-1K
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Capital Budgeting Introduction A logical prerequisite to the analysis of investment opportunities is the creation of investment opportunities. Unlike the field of investments, where the analyst more or less takes the investment opportunity set as a given, the field of capital budgeting relies on the work of people in the areas of industrial engineering, research and development, and management information systems (among others) for the creation of investment opportunities. As such, it is important
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depicted in Rand values and not percentages, thus relative comparison may prove difficult. * NPV requires a predetermined discount rate (cost of capital) which may be difficult to calculate. “Academics have long promoted the use of NPV” (Correia & Cramer, 2008, pg 33). Net Present Value (NPV) is one of the most straight-forward and common valuation methods in capital budgeting. Stated simply, NPV can be defined as a “project’s net contribution to wealth” (Brealey, Myers & Allen, 2008,
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is that it is very simple to interpret after the IRR is calculated. It is very easy to visualize for managers and that is why this is preferred till the time they come across certain occasional situations such as mutually exclusive projects etc. Hurdle Rate / Required Rate of Return has Not Required: The hurdle rate is a difficult and subjective thing to decide. In IRR, the hurdle rate or the required rate of return is not required for finding out IRR. It is not dependent on the hurdle rate and hence
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15 + $12,000/1.152 + $18,000/1.153 = $37,430.76 $10,500/1.154 = $6,003.41 Discounted payback = 3 + ($40,000 – 37,430.76)/$6,003.41 = 3.43 years The discounted payback criterion implies accepting project B because it pays back sooner than A. c. The NPV for each project
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and the after-tax cost saving. This shows the company’s profit for each of the eight years. 4) What is the project’s NPV? Explain the economic rationale behind the NPV. Could the NPV of this particular project be different for Lone Star Petroleum Company than for one of Chicago Valve’s other potential customers? From the calculations, the NPV is ($17301). (revise) The NPV process helps investors determine whether or not projects are profitable. There is a very important concept in finance:
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cash flows, NPV method, IRR method, Payback period method and PI method are three most popularly used quantitative methods to do capital-budgeting analysis. Among the three methods, NPV is better than the other two methods in most situations. 1. Definition 2. Calculation results under different methods Using the mentioned 4 methods and Excel, the following calculating result can be achieved. Project | 1 | 2 | 3 | 4 | 5 | NPV | 73.09 | -85.45 | 793.92 | 228.22 | 129.70 | IRR | 10.87%
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value of a project which requires an initial investment of $243,000 and it is expected to generate a cash inflow of $50,000 each month for 12 months. Assume that the salvage value of the project is zero. The target rate of return is 12% per annum. NPV = R × | 1 − (1 + i)-n | − Initial Investment | | i | | * * Initial Investment = $243,000 Net Cash Inflow per Period = $50,000 Number of Periods = 12 Discount Rate per Period = 12% ÷ 12 =
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Value (NPV) The net present value is the difference between the market value of an investment and its cost. [pic] NPV is a measure of the amount of market value created by undertaking an investment project. The interest rate, r, will reflect the risk of the cash flows. Finding the market value of the investment 6. Use discounted cash flow valuation (calculate present values). 7. Compute the present values of future cash flows Net Present Value Rule (NPV): An investment
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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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