Submitted By xufengdi

Words 645

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Words 645

Pages 3

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% | 6.31% | 11.33% | 0.1233 | 11.12% | Payback Period | 7 | 2 | 15 | 6 | 8 | Discounted Payback Period | 8 | 3 | 15 | 10 | 14 | PI | 1.04 | 0.97 | 1.20 | 1.11 | 1.06 |

Project | 6 | 7 | 8 | Incremental index for 7-8 | NPV | 0.00 | 165.04 | 182.98 | -17.94 | IRR | 10.00% | 15.26% | 11.41% | 10.18% | Payback Period | 1 | 2 | 7 | - | Discounted Payback Period | 1 | 3 | 7 | - | PI | 1.00 | 1.08 | 1.09 | -0.01 |

Consider that Project 7 and 8 are mutually exclusive, by calculating the incremental NPV, IRR and PI index, and we can find that project 8 should be chosen over project 7 in all the 3 methods. Thus, the ranking results under different methods can be achieved:

NPV | 3 | 4 | 8 | 5 | IRR | 4 | 8 | 3 | 5 | Payback Period | 6 | 2 | 7 | 1 | Discounted Payback Period | 6 | 2 | 7 | 1 | PI | 3 | 4 | 8 | 5 |

In payback and discounted payback period methods, project 2 and project 7 actually have the same ranking. NPV and PI methods have the same ranking results, and payback period and discounted period method have basically the same ranking results.

3. Results analysis

The three methods all have their advantages as well as disadvantages, and they can result on different ranking of the projects.

1) Pros and cons of the 4 methods a) NPV rule

NPV rule uses all the cash flows, and it is additive.…...

...-75,000 95,000 -38,000 57,000 6,33,000 359181.1997 -520000 -7,20,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 51959.95809 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 46392.81972 -7,20,000 -7,20,000 -1,39,092 73,000 65178.57143 58195.15306 Internal Rate of Return NPV @ 5% NPV Year 0 -7,20,000 34,826 Taking IRR at 5% and 12% IRR Traditional Formula = LR + { NPV @ LR/NPV @ LR - NPV @ HR} X (HR-LR) IRR 0.064017186 6.401718635 Year 1 Year 2 69523.80952 66213.15193 Year 3 63060.14469 Year 4 60057.28066 Year 5 495972.0634 Therefore Internal Rate of Return for this Project is 6.69600 A) Payback Period Year 0 1 2 3 4 5 Future Cash Flows -7,20,000 73,000 73,000 73,000 73,000 6,33,000 PV of FCF Accumulated NPV on FCF 65178.57143 58195.15306 51959.95809 46392.81972 359181.1997 -6,54,821 -5,96,626 -5,44,666 -4,98,273 -1,39,092 Pay back Period Cannot be caluculated as it is taking more than 5 years to beak even Profitability Index: PI = PVCF/ Intial Investment Present Value Initial Investment 580907.7 7,20,000 Profitability Index 0.806816 Fact File: Machine A Machine B SP 2,00,000 3,00,000 12 50,000 60,000 40,000 60,000 Year 0 Investing Activities Initial Investment Depreciation Tax Salavage value......

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...ﬁnancing decisions: V = VU +NPV(ﬁnancing decisions). • It is then obvious to deﬁne the APV of a project as the sum of its NPV to an all-equity ﬁrm and the PV of the associated ﬁnancing decisions: APV = NPV(unlevered project) + NPV(ﬁnancing decisions) • Separating the APV of a project into its NPV to an all-equity ﬁrm and the value of the associated ﬁnancing decisions should be generally useful for the ﬁnancial manager. 2 A Comparison of WACC and APV • Features/advantages of WACC. 1. WACC accounts for tax shield beneﬁt of interest in discount rate. 2. WACC is widely adopted by practitioners and is easy to use. 3. WACC is applicable when D/E remains essentially constant through project life. 4. WACC is most appropriate when the project is “typical” of the ﬁrms traditional businesses (i.e., same risk), or “scale enhancing”. • Features/advantages of APV. 1. APV accounts for tax shield beneﬁt of interest in cash ﬂows (not discount rate). 2. APV was introduced by academics and is slowly being adopted in practice. 3. 11% of ﬁrms always or almost always use it. • APV often requires/accomodates knowledge of a particular debt repayment schedule. • APV (as opposed to WACC) is suited for situations where the debt to equity ratio is changing signiﬁcantly over time (capital intensive projects and LBOs). • APV can handle “side eﬀects”: tax shield, issue costs, bankruptcy costs, etc. 3 Adjusted Present Value: Example • Suppose the ﬁrm is evaluating a project requiring a $10......

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...Assessing Projects and Risk: When the NPV is not Enough Augusto Korps Jr.- Managing Director, Sao Paolo Renato Delgado- Associate, Sao Paolo William Morishigue- Senior Analyst, Sao Paolo Discounted Cash Flow is the most widely-used technique for project assessment and is supported by modern corporate finance theory. Under this method, the expected future cash flows must be discounted by a rate that will compensate for the systematic risk of these flows. After this, decisions are based directly on the Net Present Value (NPV): if it is more than zero, the company should invest, since the project will bring wealth to the company. Despite the theory supporting this model, it's obvious that decisions are not actually based only on the "NPV>0" rule. Companies often reject projects with a low positive NPV and relevant cash flow uncertainty. For example: suppose that a company has R$ 90 million in available cash and is considering a project with immediate results that can be divided into two scenarios with equal probabilities of occurrence: the company could earn 102 or lose 100. Should it invest? The project would have an expected value of 1 (NPV>0), so in theory the company should accept it. Even with such reasoning, it would be hard to imagine a company carrying that project through. We can see, therefore, that NPV analysis is not always enough for a decision. So how can we explain this type of situation from the optics of financial theory, and how can we incorporate it......

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...present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to use the IRR method correctly. Accept or Reject Decisions Frequently, the investment decision to be made is whether to accept or reject a project where the cash flows of the project do not affect......

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...1. Assume that the before-tax required rate of return for Deer Valley is 14%. Compare the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be profitable investment. Show calculations to support your answer. We have to calculate the net present value of cash flows and compare this amount to the cost of investments. Net present value of cash flows (cash inflow – cash outflow) X the factor for PV of cash flows for ordinary annuity of $1 at 14% for 20 years, which is 6.6231 take from PV Table 1. Cash Inflow Additional skiers that the lift will allow x number of days per year when extra capacity will be needed x cost of lift ticket a day Additional skiers that the lift will allow 300 X number of days per year when extra capacity will be needed 40 X cost of lift ticket a day $55 . = Cash Inflow $660,000 Cash Outflow Cost of running the lift per day x number of days the lodge will be open Cost of running the lift per day $500 X number of days the lodge is open 200 . = Cash Outflow 100,000 Present value of net cash flow Net cash flows = cash inflow – cash outflow Cash inflow $660,000 Less Cash Outflow $100,000 = Net cash flows $560,000 Net present value of cash flows Net cash flows x the factor for P V of cash flows for ordinary annuity of $1 at 14% for 20 years is 6.231 taken......

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...value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true. Introduction To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as well as its strengths and weaknesses. From there, introduce the payback period method and then internal rate of return approach, as well as to consider their strengths and weaknesses. After outlining and explaining the three different approaches, it will finish up with comparing the different three and in a conclusion. NPV Net present value or NPV is an approach used to determine the value of an investment today (present) compared to the value of the investment in the future after taking the inflation and return into account. In simpler words, it compares the value of 1 pound today with the same pound in the future. Net present value is used in capital budgeting to analyze the profitability of an investment. It is usually calculated using tables and spreadsheets such as Microsoft Excel, but the main formula used to calculate net present value looks like this: Where C0 = Cash outflow at time t=0 Ct = Cash inflow at time t r = The discount rate As Ross (2013) states in his book, a project should be accepted if the NPV......

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...free encyclopedia Jump to: navigation, search In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, above the cost of funds. NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) — is called the yield and is more widely used in bond......

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...Present Value: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. NPV is calculated using the following formula: NPV= -C0 + C11+r+ C21+r2+…+ Ct(1+r)t - C0 = initial investment C = cash flow r = discount rate t = time If the NPV of a prospective project is positive, the project should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Example of Net Present Value To provide an example of Net Present Value, consider a company who is determining whether they should invest in a new project. The company will expect to invest $500,000 for the development of their new product. The company estimates that the first year cash flow will be $200,000 the second year cash flow will be $300,000, and the third year cash flow to be $200,000. The expected return of 10% is used as the discount rate. The following table provides each year's cash flow and the present value of each cash flow. Year | Cash Flow | Present Value = FV(1+r)t | 0 | - 500,000.00 | -500000/(1.10)^0 = -500000.00 | 1 | 200,000.00 | 200000/(1.10)^1 = 181,818.18 | 2 | 300,000.00 | 300000/(1.10)^2 = 247,933.88 | 3 | 200,000.00 | 200000/(1.10)^3 = 150,262.96 | NPV = -500000.00 +......

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...life category of a single purpose agricultural equipment with MACRS using the half year convention. Assume a 40% tax rate for Stan’s Lawn and Tree Company. What do you notice about the difference in these two methods? Solution Depreciation schedule using MACRS; Year One Depreciation = $91,000 x 0.1429 = $13,003.90 Year Two Depreciation = $91,000 x 0.2449 = $22,285.90 Year Three Depreciation = $91,000 x 0.1749 = $15,915.90 Year Four Depreciation = $91,000 x 0.1249 = $11,365.90 Year Five Depreciation = $91,000 x 0.0893 = $8,126.30 Year Six Depreciation = $91,000 x 0.0893 = $8,126.30 Year Seven Depreciation = $91,000 x 0.0893 = $8,126.30 Year Eight Depreciation = $91,000 x 0.0445 = $4,049.50 17. Cost Recovery – Brock Florist Company sold their delivery truck in problem #15 after three years of service. If MACRS was used for the depreciation schedule, what is the after tax cash flow from the sale of the truck (continue to use 30% tax rate) if a. The sale price was $15,000? b. The sales price was $10,000? c. The sales price was $5,000? Solution The accumulated depreciation after three years using MACRS is $29,000 x (0.20 + 0.32 + 0.192) = $20,648. The basis in the truck is therefore $29,000 - $20,648 = $8,352. a. If the sales price is $15,000 then the truck had a gain on sale of $15,000 - $8,352 = $6,648 and the tax liability is $6,648 x 0.30 =......

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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...investment in a project and the benefits to be obtained from that project and by monitoring the performance of the project subsequent to its implementation. Question B Project A: £000 Year NCF 1 22 2 31 3 43 4 52 5 71 Cumulative NCF 22 53 96 148 219 Payback = 3 + 125-96/52 Payback = 3 + 0.56 Payback = 3.56 years = 3 years 6,7 months Project B: £000 Year NCF 1 43 2 43 3 43 4 43 5 43 Cumulative NCF 43 86 129 172 215 Payback = 2 + 125-86/43 Payback = 2 + 0.91 Payback = 2.91 years = 2 years 10.9 months Imposing a 3 years maximum payback period, AP Ltd should accept the project B with 2.91 years of payback. Question C The payback method neglects both cash flows after the payback period and the time value of money. It has others disadvantages, these are follows: • There is a risk that projects with the shortest payback periods may be chosen even if they are not as profitable as projects with a longer payback period 3 because this method only measures cash flows; it does not measure profitability. • • • The total amount of the overall investment is ignored and comparisons made between different projects may result in misleading conclusions. It is difficult to calculate the net cash flows and the period in which they will be received. The timing of the cash flows is not taken into account. There is clearly less risk in accepting a project that recovers most of its cost very quickly than in accepting on where the benefits are deferred. Question......

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...Course Project Part II Introduction You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5). Task 4. Capital Budgeting for a New Machine A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows: Year 1 $1,100,000 Year 2 $1,450,000 Year 3 $1,300,000 Year 4 $950,000 You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000. 1. What is the project’s IRR? (10 pts) 2. What is the project’s NPV? (15 pts) 3. Should the company accept this project and why (or why not)? (5 pts) 4. Explain how depreciation will affect the present value of the project. (10 pts) 5. Provide examples of at least one of the following as it relates to the project: (5 pts each) a. Sunk Cost b. Opportunity cost c. Erosion 6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to...

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...1.NPV NPV(Net Present Value), is the present value of a project's cash flow minus the present value of its cost, it means that how much the project could create to shareholders' wealth, the more the NPV, the more value the project makes and the higher the stock's price. If NPV equal to zero means the cash flow which the project makes can compensate for the cost of investment, the rate of return equal to required rate of return. If NPV exceeds zero, the part of exceeded belongs to shareholders. Accept the project which has a positive NPV will create positive economic value added and market value added. In this case, it can be seen clearly from Table 1, SSW and CCS both has a positive NPV, they all create value and wealth for the company. What should be mentioned is that, the NPV of SSW is higher than CCS, it means SSW could add more value than CCS. Table 1. the NPVs of SSW and CCS SSW CCS NPV 240,796.39 226,897.07 2.IRR IRR(Internal Rate of Return ) is the discount rate that make the inflows to equal the initial cost, in other word, it makes NPV to equal to zero. IRR is an estimate of expected project's rate of return. If this return exceed the cost of the capital used to the project, the part of difference is a dividend to shareholders and causes the stock's price to rise. If the IRR is less than cost of capital , shareholders have to make up. In this case, the cost of capital of these two restaurants both equal to 10%, the Table 2 shows that the IRR of SSW is......

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