Capital Expenditure Valuation Methods

Capital Expenditure Valuation Methods
Capital Expenditure Valuation Methods The payback period is the time it takes for a project or investments cash outflows to be recovered by cash
inflows generated from the same project or investment. It is a very simple and commonly used capital budgeting technique. The formula used to
compute the payback period is initial investment divided by cash inflow per period. You generally want to choose the investment that provides the
shortest payback period, because you will get you cash back and it can be put toward other investments or projects. The longer the payback period the
riskier it is. Top management will normally have a target payback period. They should select the project that offers a payback period less than the
target. There... Show more content on Helpwriting.net ...
The project with the highest value should be accepted. Although, the internal rate of return method is quite accurate, it does have some disadvantages.
When uneven cash flows are involved, the interactive process is inconvenient and time consuming. Also, if there are fractional interest rates and a
present value table doesn't account for this then the internal rate of return will be difficult to determine. In some instances, certain projects may have
several rates of return that will make the net present value of cash flows to equal zero. The modified internal rate of return is also the discount rate at
which the net present value of an investment equal zero, but it is an improved version of the internal rate of return as it does not require the
assumption that project cash flows are reinvested as the internal rate of return but it determines a reinvestment rate. If the modified internal rate of
return is greater than the project's hurdle rate, which is the rate of return specified as the lowest acceptable return on investment, then the project should
be accepted. If choosing between several projects, the one with the highest rate would be the best option. The advantage of the modified internal rate of
return is that it solves some of the problems associated with the regular internal rate of return. The modified rate of return considers that funds
reinvested are going
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Cash Flow Estimation And Capital Budgeting
Running Head: Cash Flow Estimation and Capital Budgeting
Trident University
Kenosha D. Coston
Module 3 SLP Assignment
Cash Flow Estimation and Capital Budgeting
FIN 501 Strategic Corporation Finance
Dr. William L. Anderson
5 June 2016
Introduction
The information below objectives is to offer an understanding of different capital budgeting approaches. The development will contain calculations of
the NPV along with other capital budgeting approaches for example the regular payback period, discounted payback period, internal rate of return
(IRR), profitability index (PI) and modified internal rate of return (MIRR).? It at that time evaluates whether the assignment ought to be accepted or
rejected centered on the level for the standards of the different approaches. Furthermore, it presents the motives why the development would be
accepted or rejected. The information finishes with a presentation of advantages and disadvantages of each capital budgeting methodology in a table.
Computation of NPV
Solution:
Present value of Cash inflow = $2,000,000 / (1+0.125) ^1 + $3,500,000 / (1+0.125) ^ 2 + $13,500,000 / (1+0.125) ^ 3 + $89,750,000 / (1+0.125) ^ 4 +
$115,000,000 / (1+0.125) ^ 5 + $120,000,000 / (1+0.125) ^ 6
Present value of Cash inflow = $1,777,777.778 + $2,765,432.099 +$9,481,481.481 +$56,030,483.16 +$63,816,830.09 +$59,192,422.11= $193,064,427
NPV = $193,064,427 ? $125,000,000= $68,064,427
Decision:
The NPV of the project is $68,064,427. This suggests that

Capital Planning And Budgeting For The Future Of An...
Capital Planning & Budgeting
Brent Ours
American Intercontinental University
Unit 1 Individual Project
FINA320–1503–01
Jeffrey Hardin
7–26–2015
Abstract
Capital Planning refers to the process of budgeting resources for the future of an organization 's long term plans. Capital planning includes budgeting
for new or replacement machinery, research and development of new products, new plants and other major capital expenditures. Based on provided
variables the Net Present Value(NPV) and Payback Periods will be calculated. A capital budget will be present whereas decisions can be made whether
to accept or reject these projects. Projections will be made based on four–year time frame.
Capital Planning & Budgeting
The director of ... Show more content on Helpwriting.net ...
Using the figures provided calculations fro Pay Back Period, Net Present Value,Internal Rate of Return and Modified Rate of return will be determined.
Additionally, the risks associated with the projects will be addressed.
Capital Budgeting
Capital Budgeting is the process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond
one year. Capital Budgeting techniques is a tool aiding in analyzing and assessing the projects from diverse perspectives such as projecting the financial
outcome or inpact of accepting the project. Capital Budgeting is the use of existing capital for the purpose of increasing the long term returns of the
concern. Capital budgeting reimbursements accrue in future therefore reservation accompanys every undertaking.
FINA320 Unit 1 IP.xlsx
Pay Back Period Payback period can be defined as the anticipated number of years needed to recuperate an original investment. Payback indicates
number of years an invesment takess to return the actual cash outflows or investment.
Pay Back Period = Initial Investment / Annual Cash Inflows

When deciding whether to accept or reject a project: accecpt when the payback period is below the maximum payback period set by the organization.
With numerous projects, importance is given to the project with the lowest payback period.
Net Present Value
The Net Present Value (NPV) is the difference between the

Capital Budgeting Decisions
Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization 's long term investments such as new
machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or
investment, expenditures.[1]
Many formal methods are used in capital budgeting, including the techniques such as * Accounting rate of return * Payback period * Net present value
* Profitability index * Internal rate of return * Modified internal rate of return * Equivalent annuity * Real options valuation
These methods use the incremental cash flows from each potential investment, or project. Techniques based on ... Show more content on
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Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR – which is often used – may select a project
with a lower NPV.
In some cases, several zero NPV discount rates may exist, so there is no unique IRR. The IRR exists and is unique if one or more years of net
investment (negative cash flow) are followed by years of net revenues. But if the signs of the cash flows change more than once, there may be several
IRRs. The IRR equation generally cannot be solved analytically but only via iterations.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. However, this is
not the case because intermediate cash flows are almost never reinvested at the project 's IRR; and, therefore, the actual rate of return is almost
certainly going to be lower. Accordingly, a measure called Modified Internal Rate of Return (MIRR) is often used.
Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV[citation needed], although they should be used in
concert. In a budget–constrained environment, efficiency measures should be used to maximize the overall NPV of the firm. Some managers find it
intuitively more appealing to evaluate investments in terms of percentage rates of return than dollars of NPV.
Equivalent annuity method[edit]
Main article: Equivalent annual cost
The equivalent

Case02 Piedmont
1. How will discount rates of 8, 10, 12, 14, and 16 percent affect the project's feasibility?
Figures 6 – 10 provide suggested answers for this question. The answers for this question assume a useful life of 5 years. Using a discount rate of 8
percent, the net present value of all benefits is $1,732,836.16; the net present value of all costs is $1,640,384.79; the overall net present value is
$92,451.36, and the project breaks even in approximately 3.84 years.
Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall
net present value is $69,028.27, and the project breaks even in approximately 4.04 years.
Using a 12 percent discount rate, ... Show more content on Helpwriting.net ...
Hopefully, your students will suggest that additional factors should be considered. These factors include scheduling, strategic alignment, operational
objectives, government regulations, and potential benefits. If we base our decision solely on the information from the table, it appears that the custom
order tracking system has the second highest IRR. (See Figure 13 for the IRR value.)
he answer.
Test Your Design Solutions
The Test Your Design section requires students to modify their worksheet design and then use the modified worksheet to provide Ms. Pablo with
answers. Suggested answers for the Test Your Design questions are provided below.
1. What recommendations would you make if the useful life of the project is three years instead of five years? Six years? (Use the original case
values and assume a discount rate of 14 percent.)
Figure 14 shows the modified Economic Feasibility Summary worksheet. Using a 14 percent discount rate, it appears that the project breaks even in
approximately 4.54 years. At first glance, the students may recommend that the project is not feasible, if its useful life is only three years. As the
project is in its planning phase, the project team has not identified all benefits and costs. Arguably, this project is still viable, especially if the team

emphasizes the custom order tracking system's intangible benefits, such as customer service and employee morale.
In terms of six years, the net present value of all benefits is

Guillermo Furniture Capital Budget Recommendation Essay...
Guillermo Furniture Capital Budget Recommendation
ACC/543
Professor Deborah Fitzgerald–Thomas
University of Phoenix
November 08, 2010
Abstract Recent changes in the business environments and economy have prompted Guillermo to find different options to invest and stay in business.
As a new hire accountant for employer Guillermo Furniture, I have analyzed and differentiate capital budge techniques and recommended best suited
course of action.
Capital Budget Recommendation Guillermo Navallez is a handcrafted midgrade and high–end sofas manufacturer, and owns of Guillermo Furniture
Company. As a newly hired accountant in this company, I have been asked to differentiate among the various capital budget evaluations... Show more
content on Helpwriting.net ...
The internal rate of return uses the present value concepts as well as establishing the interest yield of proposed capital budget inflows is the equivalent
of the investment project that has a net present value of zero and the present value of net cash The payback method and the unadjusted rate of return
are methods that overlook the time value of money but are quick and easy to calculate but prove to be less accurate. These types of methods are
typically used for small investment. The payback method itself shows how long it will take the company to recover the initial investment cost. When
using the payback method, it is recommended to apply for a shorter payback period. The formula for computing the payback period is as follows:
Payback period = Net cost of investment Г· Annual net cash inflow Another technique for capital budgeting that doesn't compute discounted cash flow
is the unadjusted rate of return method or the simple rate of return. Investment cash flows are not adjusted to show the time value of money. This
method is also called simple rate of return and computed as follows:
Unadjusted rate of return = Average incremental increase in annual net Income Г· Net cost of original investment
Explanation of capital budget techniques The difference between present value of cash flows and the cost

Misis
Rainbow Products is considering the purchase of a paint–mixing machine to reduce labor costs.The savings are expected to result in additional cash
flows to Rainbow of $5,000 per year. Themachine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital
for such an investment is 12%.[A] Compute the payback, net present value (NPV), and internal rate of return (IRR) for this machine.Should Rainbow
purchase it? Assume that all cash flows (except the initial purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is
considering the purchase of a paint–mixing machine to reduce labor costs.The savings are expected to result in additional cash flows to Rainbow of
$5,000 per ... Show more content on Helpwriting.net ...
Themachine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A]
Compute the payback, net present value (NPV), and internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash
flows (except the initial purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is considering the purchase of a
paint–mixing machine to reduce labor costs.The savings are expected to result in additional cash flows to Rainbow of $5,000 per year. Themachine
costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A] Compute the
payback, net present value (NPV), and internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except
the initial purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is considering the purchase of a paint–mixing machine to
reduce labor costs.The savings are expected to result in additional cash flows to Rainbow of $5,000 per year. Themachine costs $35,000 and is
expected to last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A] Compute the payback, net present value
(NPV), and internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except the initial

Hearing: Internal Rate of Return and Terminal Value Essay
Harmonic Hearing
1)For both financing alternative, develop a model that shows forecasted revenues, expenses, profits, and free cash flows generated by Harmonic in
years one through seven.
–Model shown in chart below.
What is the terminal value of the company under each scenario?
As you can see in the graph below, the terminal value for the company if it takes the equity route is about $106M, where if it takes the debt route its
terminal value will be about $45M.
What cash payments will be made by the company at the end of year seven?
As you can see in the graph below, the only cash outflows from the company in year 7 will come from debt financing, with about an $11M outflow
from buying back the building from Frank Thomas, ... Show more content on Helpwriting.net ...
After year 5, they cash flow will pick up where it left off and increase even higher until they sell the company. The IRR will be around 429%. And the
value created from the small investment will be just under $45 million in only a 7 year period.
5)What are the positives and negatives of each proposal? Which financing alternative would you recommend and why?
Equity Proposal
Advantages
i.Higher IRR ii. Can immediately complete launch of new hearing aid
п‚§Will stay ahead of competition iii. Will reduce the risk of the transaction iv. Will reduce cost of goods sold on new goods from purchasing new
equipment
v.Will increase depreciation expense, lowering tax expenses vi. Will have no rent, interest, or lease expenses vii. If company goes down, will not have
to pay any additional money back
Disadvantages
i.Less ownership in company ii. Will have to invest more capital in the company than the debt proposal
Debt Proposal
Advantages
i.Maintain 100% ownership of company

п‚§Will not have to follow anyone else's plans for the business and can completely control the direction the company moves in ii. More tax deductions
Disadvantages
i.Lower IRR ii. Will have a delay in bringing new hearing aid to the market
п‚§Will allow competition to catch up to them faster iii. Will have to worry about having enough cash flow to pay for several different interest
payments and

Fin/370 Caledonia Products Essay examples
Caledonia Products Integrative Problem
FIN/370 Finance for Business
January 13, 2013 Caledonia Products Integrative Problem The following observation will describe the decisions made by a financial analyst who is
working for the capital budget department at Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an
upcoming transaction and identify several options in how to proceed. Because this is the team's first assignments dealing with risk analyzes the team
has been ask to further explain the details. The organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay,cash
flow diagram, net present value, internal rate of return, and if the ... Show more content on Helpwriting.net ...
Year–1:$2,100,000
Year–2:$3,600,000
Year–3:$4,200,000
Year–4:$2,400,000
Year–5:$1,560,000
Initial outlay
This project's initial outlay includes the necessary capital needed to purchase fixed assets and ensure they are in operating order to start the project.
Cost of new plant and equipment: 7,900,000
Shipping and installation cost: 100,000
Initial working capital required to start the production: 100,000 8,100,000
The initial outlay for this project is $8,100,000
Cash flow diagram
$3,956,000$8,416,000$10,900,000$8,548,000$5,980,400
($8,100,000)
Net Present Value and Internal Rate of Return

Unit Price x units sold
1:$21,000
2:$36,000
3:$42,000
4:$24,000
5:$15,600
Therefore, NPV = $94,575.83
NPV Values for Years
1: $18,260.90
2: $27,221.17
3: $27,615.68
4: $13,722.40
5: $7,755.98
The Internal Rate of Return (IRR) = 12.61%
Project Conclusion Deciding on whether to follow through with a project is done by evaluating either the internal rate of return or net present value.
According to Investopedia, "All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate

Star Appliance Case Study Essay
Star Appliance Case Study
Situation:
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash
compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add
the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re–evaluated by finding the weighted average cost of
capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find thenet present value, or by solving for
the internal rate of return, we should be able to see which projects Star should undertake.
Conclusion: ... Show more content on Helpwriting.net ...
The current year is 1979, so from Exhibit 3 the 1980 dividend is forecasted to be $1.70, and the stock price in 1979 is $22.50. This gives a dividend
yield of 7.56%, which is added to g. There are four ways to solve for g:
В•Dividend Growth Rate: Using the dividend schedule data in exhibit 6, g = 4.46%
В•Capital Gains Yield: I was able to find the stock prices by multiplying the P/E ratio times EPS, both of which are found in exhibit 6. g = 1.90%
В•EPS Growth Rate: These values are also found in exhibit 6, leading to g = 5.55%
В•Reinvestment Returns: I found "b" (the reinvestment rate) by using exhibit 1 to calculate the percentage of net income per share of common stock
that is paid out in dividends, and subtracting it from 1 to solve for the percentage reinvested. The return on equity, "k", is found by dividing net
income (exhibit 1) by book value (exhibit 2). G = b*k shows g = 8.14%.
Now to find the return on equity (ROE), I chose to add the average of the Dividend Growth and the Earnings Per Share Growth and use that as g. I
decided that the Capital Gains Yield was much too low compared to the other values of "g" that I found and should be discarded from further
calculations, considering it to be an outlier. The Reinvestment Returns yielded a value for "g" that is a little on the high end, but it is only based on

Discounted Cash Flow Techniques
ANALYSIS FOR FINANCIAL MANAGEMENT 10TH Edition Robert C. Higgins Additional Problems Chapter 7– Discounted Cash Flow Techniques
page 247 A brief tutorial on Excel financial functions (problems to follow) You may find the following Excel, built
–in financial functions helpful when
analyzing the problems below. (To access these functions, select Insert, Functions, and choose Financial.) =PV(rate, nper, pmt, fv, type) returns the
present value of a series of cash flows. =FV(rate, nper, pmt, pv, type) returns the future value of a series of cash flows. =PMT(rate, nper, pv, fv, type)
calculates the periodic payment for a loan based on constant payments and a constant interest rate.... Show more content on Helpwriting.net ...
He presents this as obvious proof of "gouging on the part of the money changers". Do you agree? Why, why not? 5) In 1984, the city council of the
town of Patterson agreed that their community badly in need of a modern hotel that would cost approximately $25 million. To finance construction
members of the council organized the Patterson Hotel Corporation. Through strenuous promotion they raised $15 million by selling 15,000 shares
of stock at $1,000 per share. They secured the other $10 million necessary to build the hotel as a loan provided by a local bank on a 10 year, 14
percent mortgage that called for uniform annual payments sufficient to pay interest and to extinguish the debt at the end of 10 years. Upon completion,
the Patterson Hotel Corporation leased the hotel to a national company that operated a chain of hotels. The lease ran for 30 years and contained a
clause permitting the lessee to purchase the hotel for $10 million at the end of the 30–year period. The lessee agreed to furnish the hotel and pay all
taxes (including income taxes) and operating expenses, and was to meet the interest and repayment obligations on the mortgage during the first 10
years of the lease. During the last 20 years of the lease, the operating company agreed to make payments sufficient to permit annual dividends of $400
per share. No payments at all were to be made to the stockholders during the first 10 years. This was the most favorable operating

Capital Budgeting
Capital Budgeting One of the most important decisions a financial manager can make involves capital budgeting. Capital budgeting is used to
determine which fixed assets should be purchased. The purchasing of fixed assets is a form of a long–term investment. Allocating funds in the capital
account is a form of capital budgeting. A financial manager will determine if the purchase of a capital asset or fixed asset is worth more over that
assets life then it is for the cost to purchase it. In other words, they make sure that the asset would get the amount it cost plus a profit in return.
Financial managers cannot seem to agree on a specific method that works better than the other when it comes to estimating and budgeting. Even in the
... Show more content on Helpwriting.net ...
There is no guarantee that the future estimates will reflect the actual cash flows. Errors are a common occurrence in forecasting, estimating and
budgeting. The forecasting risk that there are errors that will lead to misinformation, causing the wrong decisions to be made on a proposal. The
Payback Rule When talking about "payback," it is referring to the amount of time it takes to regain the amount it cost a business to pay for the
investment. In other words, how many years does it take to generate enough cash flows from the investment to cover its costs. It can also be seen as
the amount of time it takes for an investment to "breakeven." The amount of time is a predetermined amount, and that amount is what is factored in
when determining if the investment is a good investment. For example, if a company decides they want to invest in a capital asset that would take less
than five years to payback, and after calculating the cash flows and determine it will take only three years to payback or generate enough from the
investment, than the investment is a good investment. There is no set rule when determining how much time an investment should have for the
payback. That is up to the discretion of the financial managers. One issue with the payback method is that it ignores time value. When estimating the
cash flows and the payback, it is good to project over the entire allotted time span on what the cash flows would be.

Net Present Value: The Advantages Of Net Present Value
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital
investment to break down the profitability of a projected investment or project.
The following is the formula for calculating NPV :
A positive Net Present Valuepoint that the projected earnings generated by a project or investment (in present dollars) exceed the anticipated costs
(also in present dollars). Normally, a profitable investment has a positive NPV and negative NPV will result in net loss.
Decision rule – When there is a mutually exclusive project is to choose one with highest NPV (Acowtancy, 2015). The higher the positive NPV, the
more attractive the project (Thompson, August 2015). ... Show more content on Helpwriting.net ...
NPV also takes into account of time value of money and also based on cash flows, which are less subjective than profits (Keong, 2015). Another
benefits of NPV is that it is based on real cash flows and considers the whole life of the project (Acowtancy, 2015).
Disadvantages – It involves a lot of calculation which may be difficult for some managers. The discount rate and inflation rate is constant during
calculation where in actual, it may change due to economical factors.
Accounting rate of return (ARR)
Average rate of return also called as the Accounting rate of return, or ARR is a financial ratio used in capital investment. ARR calculates the return,
created from net income of the proposed capital investment. ARR will be in the form of percentage return. The following is the formula for calculating
ARR: Decision rule – The project is acceptable when the ARR is equal to or greater than the desired rate of return. When comparing investments,
people will look to the higher ARR, because the higher the ARR, the more attractive the investment.
Benefits – ARR can be calculated and understand easily. Most managers and accountants uses ARR because it is expressed in percentage terms that
they are familiar

New Heritage Doll Company Write Up
Marina Chmykhalo–Friermood Professor N. Cohen FINA 6273–Section 10 October 23, 2014 New Heritage Doll Company Write–up Introduction New
Heritage Doll Company is a firm that has ventured into doll production which has sought to extend its brand in order to broaden its market framework
and more importantly capitalize on high levels of customer loyalty. The vice president of the Company, Emily Harris, is to forward her project
proposal to the Budgeting Committee for evaluation. The Vice–president's objective for proposing the project was based on potential to strengthen the
Company's division of production and drive future growth. Emily Harris has to produce a compelling project to avoid the committee from declining
the proposal. Basis of... Show more content on Helpwriting.net ...
However, the company is also limited to take this project due to several constrains including: low production runs and volumes, limited gradation of
customization increased manufacturing complication; increase in production and development costs for the technology modification and
infrastructure. One of the key distinctions between the two projects is that Design Your Own Doll and Match My Doll Clothing are two mutually
exclusive projects. Their cash flows are related and have the same function and they compete with each other meaning that the acceptance of one
project eliminates consideration of the other project. DCF and Sensitivity Analysis The Company should maximize on cash management by capital
rationing on the project accepted. NPV of the project should be implemented as it reflects the time value of money invested in the accepted project.
Similarly this can be further elaborated by computation of IRR of both project proposal. The analysis was performed by comparing the two projects
using the same fixed terminal growth rate of 3% because both projects include a terminal growth rate element. For both projects, it would also be
beneficial to know how the terminal growth rate value is generated. Because the "medium"– risk projects in the production division received a discount
rate of 8.4% in 2010, this rate was used for the Match My Doll Clothing line's DCF analysis. Design Your Own Doll project is long–term project

Introducing The Internal Rate Of Return
INTRODUCING THE INTERNAL RATE OF RETURN (IRR)
The Internal Rate of Return (IRR) is that discount rate providing a net value of zero for a future series of cash flows. The IRR and Net Present Value
(NPV) are used to decide between investments to select what investment should provide the most returns. DIFFERENCE BETWEEN THE NPV AND
IRR
The main difference is that the Net Present Valueor Net Present Value (NPV) is used as actual amounts, while the IRR is the interest yield as a
percentage expected from an investment.
When using the IRR, one generally selects the projects whose IRR is greater than the cost of capital. However, selecting the Internal Rate of Return as
opposed to the Net Present Value means that if investors focus on maximizing IRR instead of NPV, there is a risk in picking a company with a return
on investment bigger than the Weighted Average Cost of Capital (WACC) but less than the present return on existing assets.
IRR represent the actual annual return investment only when the project generates 0 interim cash flows – or if those investments can be invested at the
current IRR.
So the goal should not be to maximize the Net Present Value (NPV).
However, this article aims to present the limitations and benefits of using the Internal Rate of Return (IRR).
Net Present Value (NPV)
The net present value of a project depends very closely the discount rate used. So when it comes time to compare two projects, the choice of discount
rate, which is often based on

Different Aspects Of An Investment
Abstract
This paper explores and analyzes the different aspects of an investment in a company. Two different corporations were analyzed and a decision was
made regarding which corporation would be given an investment. The acquisition of two corporations was not allowed, as there was a spending limit
among the two. I made substantial analysis for the two corporations, as this is very significant for possible growth of our own company. I analyzed a
five–year projected income statement and a five–year projected cash flow. I also determined the Net Present Value, and Internal Rate of Return among
the two companies to make a decision. This paper also includes three peer–reviewed sources to combine with the theoretical explanations.
Introduction
The thought of acquiring another corporation has come up among our own, and there are two possible opportunities. Each has a cost of $250,000, and
we are not allowed to exceed that cost. The first possible company is Corporation A, which includes revenues of $100,000 in year one, growing by
10% per year. It includes expenses of $20,000 in year one, growing by 15% per year. It also includes depreciation expense of $5,000 each year, a tax
rate of 25%, and a discount rate of 10%. The second possible company is Corporation B, which includes revenues of $150,000 in year one, growing by
8% each year. It also includes expenses of $60,000 per year, growing by 10% each year. Lastly, it includes depreciation expense of $10,000 per year, a
tax

Business 650 Managerial Finance: The Modified Internal...
MIRR VS. IRR
Charles Beale
Ashford University
Business 650 Managerial Finance
Professor Rick Kwan
September 17, 2012
The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at
dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold,
ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because
it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.
The use of Internal ... Show more content on Helpwriting.net ...
Choosing the hardware and software to improve efficiencies that has an initial cash out flow for the hardware and yearly subscription fees for the
software, cash inflows from the deployment and re–allocation of human assets to revenue generating positions, reductions in costs, improving patient
flow to allow for more patient visits per day involve multiple cash flows and would be difficult to analyze with the Internal Rate of Return. This is
often complicated with the scale of the deployment. The hospital system may decide that it wants to deploy 150 units. The scale of this program
can be in the millions of dollars and costs savings and the reallocation of employees to revenue producing positions can far exceed the cost of the
technology over a significant period of time. This case it can be seen that the using the Internal Rate of Return with the potential for multiple
additional cash flows can be difficult. If there were no salvage or trade in value to the purpose built hardware systems and those systems had to be
disposed of in an environmentally friendly way with a negative cash flow. This produces the problem of multiple rates of rates of return. This is similar
to many examples of strip mines where there is a cash outflow at start up, cash inflows during the project and then cash outflow to return the land to
pristine condition. The internal rate of return on these cases tends to produce astonishingly high or astonishingly negative

Capital Budget Recommendation
Capital Budget Recommendation
ACC/543
Capital Budget Recommendation As a dedicated furniture maker and businessman, a clear understanding of the techniques used to assist in capital
budgeting is important. There are several techniques used, each having advantages and disadvantages. Within this recommendation, the advantages and
disadvantages of each technique will be briefly discussed. Additionally, discuss how each technique will assist in determining the desirable capital
budget technique to recommend. Concluding with a course of action Mr. Navallez should take, along with calculation to support the recommended
course of action.
Capital budget techniques Several techniques can be used to analyze an opportunity to invest in ... Show more content on Helpwriting.net ...
This technique assist in the decision making process because once the internal rate of return is determined, the desired investment can easily be
decided. Taking the cash outflow and inflow from each alternative and the desired rate of return will offer the best comparison as which investment
will present a return favorable.
Recommendation
The recommendation Mr. Navallez should take is alternative 1. Alternative 1 offers the best return on investment. The use of thenet present value
techniques presents the desired return on investment. Net present value over internal rate of return presents the expected return on cash outflows for
the cost of the investment, thus allowing management to "compute a present value index." (Edmonds, Edmonds, Olds, McNair, & Schnieder,
p.1160) Assume the desired rate of return is 8% over 10 periods, alternative 1 cash inflow would be $421,834 with cash outflow being $323,091 and
alternative 2 cash inflow of $314,057 with cash outflow being $283,930. The present value of alternative 1 is $98,743 and alternative 2 is $30,127.
Alternative 1 yields a higher rate of return, however, taking it a step further to confirm alternative 1 is the best investment the present value index
offers an additional comparison of the two investments.

Higher National Diploma
INTRODUCTION As we are aware, finance is the lifeblood of business or it can be said as the most important part of all the business enterprises.
To understand finance, you need to know the entire business indeed. Finance can be used for various reasons like expanding the business, investing
and purchasing fixed assets like land and building, machinery so on. In order to survive in this competitive world every organisation need to have a
good strength of finance available to their business or else they won't be able to survive in this world. Hence, it is very important to select the correct
sources of finance available to the company. Finance can be in two types' external sources or internal sources. TASK ONE 1. SOURCES OF FINANCE
This is a common method of financing a start–up. The founder provides all the share capital of the company, retaining 100% control over the business.
The advantages of investing in share capital are covered in the section on business structure. The key point to note here is that the entrepreneur may be
using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. The
shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.
A start–up company can also raise finance by selling shares to external investors – this is covered further below. 1.2 External sources * Loan capital
This can take several forms, but the most common are a bank loan or bank overdraft. A bank loan provides a longer–term kind of finance for a
start–up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of
repayments. The bank will usually require that the start–up provide some security for the loan, although this security normally comes in the form of
personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in

Problems Between of Internal Rate of Return and Modified...
This research paper discusses the problems that exist between IRR and MIRR methods and proves that the MIRR is the better method to choose
from. The MIRR method is very useful because it can aid an individual when it comes to investing and capital budgeting. One important advantage
that the MIRR method has over the IRR method is that it provides a more effective analysis of capital budgeting. The MIRR method is highly
recommended for projects in which cash flow is constantly changing or when the project is mutually exclusive. A scenario in which the MIRR
method should not be utilized is when one is attempting to make decisions concerning investment over individual projects. Internal Rate of Return
IRR is considered to be an important method for capital budgeting proposals. The Internal Rate of Return is the rate, where present value of cash
inflows and outflows comes out to be equal or the rate at which NPV from the project comes equal to zero. At this rate, there are no benefits or losses
for the Organization. If the Organization earns an IRR on the investment, the NPV will be equal to zero for the investment. It also helps the Management
to take a decision regarding investment as to whether they should invest in project or not. A higher IRR makes the project desirable to be undertaken.
It provides information about the efficiency of the project because it is based on the assumption that all the cash inflows are invested again in the
project at the IRR basis (Brigham &

Budgeting
Budgeting Model Case Paper
February 24, 2014
When incorporating whether to purchase Corporation A or Corporation B, it was easy to choose Corporation B. The reason behind this decision is
based on a multitude of things. The income statements are close to one another, and even though the statement is slightly greater in Corporation A than
B, that is not the main reason for the decision. The income statement is very similar to a company's cash flow. With the income statement being
marginally greater with company A the cash flow of company B is much greater. Unlike the difference of just under $200 with the net income, the
cash flow is greater by more than $3,500 between the two corporations. Cash flow can be defined as "A ... Show more content on Helpwriting.net ...
As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects,
the project with the highest IRR would probably be considered the best and undertaken first ("Internal Rate Of Return – Irr", 2014)." When looking at
both companies discount rates, they are within 1% of one another. The higher the discount rates the better the profit for that particular company.
Corporation A has a discount rate of 10%, while Corporation B has a discount rate of 11%. Generally speaking, the higher the discount rate the more
profitable that company will become. The similarities between net profit revenue, and internal rate of return is how well they work with one another.
Even though both companies have a starting sale of $250,000, they have many differences between them. The NPV and IRR work well with one
another in providing the proper information needed in determining whether to buy or pass on a particular business. Both companies are profitable, but
as explained earlier, the higher the net profit revenue along with the higher discount rate is a no brainer in the decision process to purchase Corporation
B. Net profit revenue uses the rate to help find the internal rate of return. Using the $250,000 as a starting point in both calculations of net profit
revenue and internal rate of return

Finance
An organization's valuation can create very efficient planning and capital distribution making this an important step in the organization's valuation. The
short and long term investments of an organization affect the day to day decisions of management and it also affects the organization's value. Because
this affects the value of the organization it becomes extremely important to use appropriate and precise valuation methods in order to estimate business
activities and or projects that can affect the value. Using valuation methods such as Internal Rate of Return or the Modified Internal Rate of Return can
eliminate improper decisions and the organization will be able to manage their assets and capital in a successful manner and meet the ... Show more
Even though the figures may be different management usually choose the projects with the highest internal rate of return because the estimates are
high. The discounted rate is the measure of the internal rate of return when the net present value is at zero.
The net present value is also used as a method of valuation and helps determine the internal rate of return. This is a very important set in deciding on
a project because if the estimated calculations are not done properly this can lead to a bad business decision and it can lead to a smaller profit or even a
loss on the project.
The internal rate of return assumes that the project/investment has initial cash outflow for the future. This is not always true because there may be
expenses that are not redirected in the initial cash outflow.
In the net present value formula, if the income amounts (Ct) received in each period is higher than the expected amount then a higher internal rate of
return must be known to reset the net present value at zero. The internal rate of return shows positive figures that management uses to select projects.
However, because there is an estimate it can cause the budgeting to have mistakes because of the reinvestment figures. For example if there are two
projects that have internal rate of returns that are the same at 15%, have the same figures for the cash flow, risks, and the allotted time

Study Guide
1.When a firm maximizes profits it will simultaneously minimize opportunity costs. Answer:True Terms to Learn:opportunity cost
2.The usual starting point in budgeting is to forecast net income. Answer:False Terms to Learn:operating budget The usual starting point in budgeting
is to forecast sales demand and revenues.
3.If the $17,000 spent to purchase inventory could be invested and earn interest of $1,000, then the opportunity cost of holding inventory is $17,000.
Answer:False Terms to Learn:opportunity cost The opportunity cost of holding inventory is $1,000.
4.The revenues budget should be based on the production budget. Answer:False Terms to Learn:... Show more content on Helpwriting.net ...
Answer:True Terms to Learn:relevant costs
19.When replacing an old machine with a new machine, the book value of the old machine is a relevant cost. Answer:False Terms to Learn:relevant
costs The original price of the old machine is a past cost and therefore an irrelevant cost.
20.A four–quarter rolling budget encourages management to be thinking about the next 12 months. Answer:True Terms to Learn:rolling budget
21.Since fixed manufacturing overhead is fixed, it is not normally included in the operating budget. Answer:False Terms to Learn:operating budget
Fixed manufacturing is normally included in the operating budget.
22.The manufacturing labor budget depends on wage rates, production methods, and hiring plans. Answer:True Terms to Learn:operating budget
23.Variances between actual and budgeted amounts inform management about performance relative to the budget. Answer:True Terms to
Learn:responsibility accounting
24.Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the
life of the project. Answer:False Terms to Learn:discounted cash flow (DCF) methods As if they occurred at a single point in time.

25.Discounted cash flow methods focus on operating income. Answer:False Terms to Learn:discounted cash flow

Sap for Atlam
CASE 6 : SAP FOR ATLAM
BACKGROUND OF THE COMPANY
Company Name : Akademi Teknikal Laut Malaysia (ATLAM)
Principal Activities : Education & Training
Commenced Operation : 15th August 1981
Number of Employees :Approximately 200 employees
Office : Melaka & Terengganu
Main Problem : Asked to upgrade its accounting system with the PETRA group–wide SAP system which takes up a very high initial investment
compared to ACCPA
Introduction on SAP
SAP is an Enterprise Resources Planning (ERP) and stands for Systems, Applications and Products in data processing. It is a system that handles almost
all departments in an organization. SAP has several modules as illustrated below.
ISSUES/CHALLENGES AND SOLUTION 1. Upgrading ... Show more content on Helpwriting.net ...
Furthermore, in the long run, more cash flow is expected as well.
C. Payback Period
Payback period is a method that estimates the amount of time required for the cash flows generated by the investment to repay the cost of the
investment. This analysis provides insight into

Irr V. Mirr Valuation Methods
Carrie Simmons
IRR v. MIRR Valuation Methods
Bus 650 Managerial Finance
Kristi Rayford
February 7, 2012
1.
Abstract The Internal Rate of Return (IRR) and Modified Internal Rate (MIRR) of Return are imperative to understanding the investment on a project
and the expected returns or profitability. Under the valuation method of IRR is to accept the project which has the greater number of required rate of
return, or otherwise, reject the project. However, MIRR is better indicator of the project's true profitability
IRR v. MIRR Valuation Methods
The Internal Rate of Return (IRR) is defined as the rate of return that would make the present value of future cash flows plus the final market value of an
Alternatively, if the payments are raised to, say $1,100, the IRR of that loan will rise to 5.2%. (investopedia)
The formula for IRR, using this example, is as follows: 1. Where the initial payment (CF1) is $200,000 (a positive inflow) 2. Subsequent cash
flows (CF 2, CF 3, CF N) are negative $1050 (negative because it is being paid out) 3. Number of payments (N) is 30 years times 12 = 360 monthly
payments 4. Initial Investment is $200,000 5. IRR is 4.8% divided by 12 (to equate to monthly payments) = 0.400% | | Figure 1: The formula for
calculating internal rate of return (IRR)| (investopedia) )

Example of MIRR
MIRR value is always unique given that we have at least one negative and one positive net cash flow. The modified internal rate of return is an
average of the compounded future value of positive cash flows over the discounted present value of negative cash flows. This is a compound example
below with positive cash flow at the reinvestment rate aka WACC or discount rate to find future value, and we discount each negative cash flow at the
finance rate to find the present value. We then find the average of this ratio of net future value over thenet present value to come up with MIRR value
and formula below:
Let us assume we set up an investment that requires an initial investment of $100,000 and we expect to receive benefits and incur costs as $40,000
35,000 –20,000 40,000 38,000

Revlon Inc. 2007 by M.Jill Austin
Capital Budgeting Techniques| |
GLOSSARY
Capital Budget: (1) The amount of money set aside for the purchase of fixed assets (e.g., equipment, buildings, etc.). Also, (2) a request for
authorization to purchase new fixed assets.
Mutually Exclusive Proposals: Consideration of two or more assets that perform the same function. If one is chosen for purchase, the others are
automatically rejected.
Profitability Index: A ratio of the present value of the benefits (PVB) to the present value of the costs (PVC). The index is used instead ofNet Present
Value(i.e., PVB – PVC) when evaluating mutually exclusive proposals that have different costs.
As the picture above illustrates, the capital budgeting decision may be thought of as a ... Show more content on Helpwriting.net ...
Here are our decision rules: If the NPV is:| Benefits vs. Costs| Should we expect to earn at least our minimum rate of return?| Accept the investment? |
Positive| Benefits > Costs| Yes, more than| Accept| Zero| Benefits = Costs| Exactly equal to| Indifferent| Negative| Benefits < Costs| No, less than|
Reject|
Remember that we said above that the purpose of the capital budgeting analysis is to see if the project 's benefits are large enough to repay the
company for (1) the asset 's cost, (2) the cost of financing the project, and (3) a rate of return that adequately compensates the company for the risk
found in the cash flow estimates.
Therefore, if the NPV is: * positive, the benefits are more than large enough to repay the company for (1) the asset 's cost, (2) the cost of financing
the project, and (3) a rate of return that adequately compensates the company for the risk found in the cash flow estimates. * zero, the benefits are
barely enough to cover all three but you are at breakeven – no profit and no loss, and therefore you would be indifferent about accepting the project. *
negative, the benefits are not large enough to cover all three, and therefore the project should be rejected.
3. Internal Rate of Return
The Internal Rate of Return (IRR) is the rate of return that an investor can expect to earn on the investment. Technically, it

Case
| Amstelveen Corporation|
Memo
To:Ford Allen
From:Katie
Date:[ 2/22/2012 ]
Re:Recommendation for Amstelveen Corporation's project investment
The purpose of this memo is to explain and recommend which projects Amstelveen Corporation should invest in based on capital budgeting
calculations. First, I will explain if there are any contradictory recommendations and then I will give the recommended total I suggest Amstelveen to
raise. I will also give my recommendation on which project(s) the company should pursue if it remains limited to в‚¬8,000.000.
Recommendation of Inadvisable Investments
I began my process of identifying which projects would be inadvisable to pursue based on company policies by first calculation the net ... Show more
Another project that I would not recommend is Project D. Even though this project has an acceptable net present value, accounting rate of return, and
payback period the internal rate of return of 3% is not acceptable. The internal rate of return is a larger determining factor than the other figures.
Recommendation of Advisable Investments
Based on Amstelveen Corporations' policies and capital budget figures, I recommend that the corporation to invest in Projects A, B, C, and E.
Project A has a very high internal rate of return and accounting rate of return. This indicates this project will be highly profitable and a positive net
present value will increase the value of the corporation. The payback period of 1.5 years also falls within the 2 year cut–off stated in the policy. Both
Projects B and E have acceptable internal rate of returns and accounting rate of returns as well. This indicates profitability for the company. Since the
net present value for these projects are positive, they have positive cash flows and much value in the corporation.
Project C is another project I recommend to invest in although the payback period of over the cut–off by six months. However, this project has a highly
acceptable internal rate of return and accounting rate of return. The net present value is large, which would add a lot of value to the company. In my
opinion, these three other factors are large enough to outweigh the payback

The North Sea Oil Company
Capital budgeting is one of the essentials in marketing decisions for many companies, and it determines whether the invested projects are worth
pursuing in the long run or not. Great sums of money can be easily wasted if the investments turn out to be uneconomical and wrong. Therefore;
smart investing is very important for the companies that are looking for future growth and success in the both domestic and global marketing.
Successful investment projects benefit to the companies by increasing in cash flow and decreasing its risks. North Sea Oil Company is one of the
companies that is looking for future increase in cash flow and decreasing its risks by smart investing into two projects. Therefore, this portfolio project
will address about the North Sea Oil Company's proposed capital budgeting projects by using capital budgeting techniques to calculate and evaluate the
company's weighted average cost of capital, payback period, net present value, and internal rate of return from the given case information because
calculating the capital structure based on the assumption the projects are implemented will give the investors either positive or negative signals.
Weighted Average Cost of Capital (WACC) There are two main sources that a firm can use to raise capital are equity and debt. Weighted average cost
of capital is the average of the costs of these two sources of finance, and it gives each one the appropriate weighting. When a firm takes a new project, it
usually

Exam 3 Practice
t Finance 333 Practice Examination 3 1.Given the following information on S & G Inc. capital structure, compute the company's weighted average
cost of capital. Type of Percent of Before Tax Capital Capital Structure Component Cost Bonds 40% 7.5% Preferred Stock 5% 11% Common Stock
(Internal Only) 55% 15% The company's marginal tax rate is 40%. a.13.3% b.7.1% c.10.6% d.10% 2.In general, the most expensive source of capital
is: a.preferred stock b.new common stock c.debt d.retained earnings 3.Sonderson... Show more content on Helpwriting.net ...
$4.8 million c.$8.2 million d.$12.0 million 13.The break–even quantity of output results in an EBIT level: a.equal to the fixed costs b.equal to the
contribution margin c.equal to zero d.dependent upon the sales level 14.Financing a portion of a firm's assets with securities bearing a fixed rate
of return in hopes of increasing the return to stockholders refers to: a.business risk b.financial leverage c.operating leverage d.all of the above
15.Optimal capital structure is: a.the explicit cost of debt b.the implicit cost of debt c.the change in the cost of equity caused by the issuance of the
debt d.none of the above 16.A high degree of variability in a firm's earnings before interest and taxes relates to: a.business risk b.financial risk
c.financial leverage d.operating leverage 17.The final approval of a dividend payment comes from: a.the controller b.the president of the company
c.the board of directors d.It is a joint decision requiring approval from all of the above. 18. Fixed operating costs do not include: a.interest changes
b.rent c.depreciation d. all of the above Use the following information to answer the next 3 questions: The initial outlay for Project A is $10,000. The
firm's required rate of return for

Diamond Chemicals
Diamond Chemicals PLC Executive Summary
Diamond Chemicals is considering two mutually exclusive projects, the Merseyside project and the Rotterdam project, for the production of
polypropylene
When considering the Merseyside project, senior–management wants a positive impact on earnings per share. The addition to earnings per share was
ВЈ28,800 with an average addition of ВЈ2,000 per year2. Calculated with erosion, the addition to earnings per share was ВЈ18,800 with an average
addition of ВЈ1,100 per year2. The payback period for the project was 3.10 years, when considering the erosion of Rotterdam, this would increase to
3.46 years2. The net present value of Merseyside is ВЈ15.61 million and when considering erosion, the net present ... Show more content on
Helpwriting.net ...
Refurbishing the polymerization tank to achieve higher pressures and thus greater throughput. Renovating the compounding plant to increase extrusion
throughput and obtain energy savings.
Bruner: Case Studies in Finance
The project would have an initial outlay of ВЈ9 million and will require the entire line to be shut down for 45 days. This project would lower energy
requirements and have a 7% greater manufacturing throughput. Also, it is expected to improve its growth margin to 12.5%.
Bruner: Case Studies in Finance
Concerns at Merseyside:
There are also some concerns that have been brought to our attention from different divisions of Diamond Chemicals. They include:
Concerns of the Transport Division:
Concerns coming from the Transport Division were those of the increased capacity that they would receive as a result of the Merseyside project. This
project would increase the allocation of tank cars to Merseyside. To realize this expansion, the Transport Division would need to purchase a new
rolling stock. This purchase would cost ВЈ2.0 million. As stated earlier, Greystock has left this portion out of his Discounted Cash Flow analysis, stating
that

ACCT614-1403A-02 Applied Managerial Accounting
ACCT 614 – 1403 A– 02
IP 3
Colorado Technical University
David Christian
08/04/2014
To: EEC President
Company Memo This memo has been constructed for the purpose of reporting information the president of the company in reflection the purchasing of
a supplier in the near future. It reflects information concerning Calculate Net Present (NPV), Internal Rate of Return (IRR), along with the payback of
the investment opportunity. In this company memo the following information will be discussed:
$500,000 savings per year for the next 10 years.
EEC's cost of capital/14%.
EEC's purchase of the supplying company for $ 2 million.
The focus of EEC's investment of the purchasing of the supplier is to cut down on ... Show more content on Helpwriting.net ...
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million)
initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can
anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of
formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then
it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial
proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile
investment financial venture for the company.
Changes/Investment Opportunity Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28%
in accordance with the Net Present Valuewhich is $500,000 the question being would still be worth it to make the investment to the company (Needles,
2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these
calculations the investment would not

Essay on Managing Financial Principles and Techniques
BTEC Level 7
Advanced Professional Diploma in Management Studies
Managing Financial Principles and Techniques
Prepared for:
McCain's Board of Directors
By
Arslan Irshad Dar
Tooting and Broadway consults
12 June 2010
Table of Contents
Introduction....................................................................................................1
Merits of accounting rate of return..............................................................................................1.1
Demerits of accounting rate of return.........................................................................................1.2
Merits of Payback ... Show more content on Helpwriting.net ...
McCain's investment in alternate energy and waste lagoon together will cost 150 millions with a possible cost of capital 15% per annum. So, McCain
therefore need to evaluate profitability, feasibility and cost effectiveness of both project in long run.
We as financial consultants at Tooting Broadway consult presenting this formal report on the issues raised byFinance Director to the Board of Director
of McCain.
Investment Appraisal
Standard techniques of quantitative investment appraisal in business today are the payback time method, the internal rate of return (IRR) and the Net
Present Value(NPV), Accounting Rate of Return (ARR) rule accompanied with a sensitivity analysis and often also scenarios. The central argument is
that the standard techniques fail to capture management's flexibility to adapt and revise later decisions in response to market development. Below are

the few merits and demerits of these Investment appraisal techniques.
Merits of Accounting Rate of Return (ARR)
пѓ It is very simple to understand and use.
пѓ Rate of return may readily be calculated with the help of accounting data.
пѓ They system gives due weight age to the profitability of the project if based on average rate of Return. Projects having higher rate of Return will
be accepted and are comparable with the returns on similar investment derived

Millegan Creek Apartments- Financial Analysis Essay
The Millegan Creek Apartment case is an example of a commercial loan. The parties involved in the commercial loan are JP Multifamily Inc. and
Fleet Bank. Real Estate group at Fleet Bank want to find out whether or not to accept JPI's proposed $15,715,000 loan for a 390–unit apartment
project in Austin, Texas. The details about the each party, market and financial analysis of the project is outlined below. THE BORROWER–JP
MULTIFAMILY INC. The Development Expertise JPI Multifamily Inc.(JPI) was founded in 1989 by John Carpenter and Frank Miller, who had
worked together at Southland Financial. JPI, a first class developer, was known as a "merchant builder" meaning that they developed properties with
the intention of selling rather than... Show more content on Helpwriting.net ...
Total Project Cost: $19,644,000 Loan Amount: $15,715,000 Land Cost: $1,425,000 The holding period: Target holding period is two to three years
MARKET ANALYSIS Regional Economic Drivers Austin housing market holds a comparative advantage and this advantage exists because;–it's
ranked sixth in the nation as a preferred location for a new manufacturing facility, – Austin economy had always been universities and government as
the state capital. Austin had a government workforce of over 110,000 including state, country and city employees and plus recently added 3,000
government sector jobs, –The location of project was close to many of Austin's high tech companies. Texas Instruments had a big campus located across
the street. Others in the area included: Abbott Laboratories, Tandem Computers, 3M, and State Farm Insurance. Apple Computers had also announced
plans to build a new, $28 million, 300,000square foot facility to house its U.S. Customer support Service – The other strength of Austin is that the city
is filled with good universities. Companies were attractive to Austin economy by the presence of university –based research and its very desirable
climate. Market demand Austin had experienced significant population growth and local economists expected these trends to continue. The average
family size would continue to be about 2.43 people per household. Job Growth Since the

Sun View Valley Corporation ( Svvc )
School of Business & Economics
Master of Business Administration
BUSN–6020 – Corporate Finance (Winter 2015) Case Study Assignment 2: Sun View Valley Corporation (SVVC)
Prepared for:
Dr. Raymond Cox
Contents
Executive Summary2
Question 1 – Methods Used3
Payback Method3
Discounted Payback3
ARR Method (AAR, ROI)4
Profitability Index (PI) or Benefit / Cost Ratio4
Internal Rate of Return (IRR)5
Modified Internal Rate of Return (MIRR)5
Equivalent Annual Annuity5
Question 2 – Sensitivity Analysis6 o Selling Price7 o Variable Cost7 o Fixed Cost7 o Investment Cost7 o Net Working Capital7 o Discount Rate7
Question 3 – If the abandonment value is $9 million8
Question 4 – Should SVVC make this investment?8 ... Show more content on Helpwriting.net ...
It is our recommendation that SVVC should execute on the investment in the Venus Vinos Project.
To further support the decision to move forward on the project we conducted a sensitivity analysis which shows the projected estimates are heavily
reliant on selling price and net working capital remaining unchanged.
Our attempts to mitigate forecasting risk have been significantly lessened because of the number discounted cash flow methods we have employed in
our analysis. The scope of the project does not take into consideration technological improvements or human resource associated risk. There are also
no external economic considerations made for the purposes of this project. SVVC is considering the VVP solely as a mutually exclusive option with
no other alternatives. No capital rationing has been considered in this project and this project has been analyzed with the Stand Alone Principle in mind.

Question 1 – Methods Used to evaluate the investment using the payback, discounted payback, ARR, NPV, PI, IRR, MIRR and equivalent annual
annuity methods.
When we evaluate the project using all the methods as outlined below, the picture for SVVC potential investment in VVP becomes clearer. By using
multiple methods for the project, we are assessing the project from many financial perspectives to mitigate the potential for error related to application
of just one DCF. The differences in

Internal Rate of Return
Internal Rate of Return Meaning of Capital Budgeting п‚— Capital budgeting can be defined as the process of analyzing, evaluating, and deciding
whether resources should be allocated to a project or not. п‚— Capital budgeting addresses the issue of strategic long–term investment decisions. п‚—
Process of capital budgeting ensure optimal allocation of resources and helps management work towards the goal of shareholder wealth maximization.
Why Capital Budgeting is so Important? п‚— Involve massive investment of resources п‚— Are not easily reversible п‚— Have long–term
implications for the firm п‚— Involve uncertainty and risk for the firm Capital Budget Techniques Net PresentValue Discounted BenefitCost
/Profitability... Show more content on Helpwriting.net ...
In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected
return), but a higher NPV (increase in shareholders' wealth) and should thus be accepted over the second project. A method called marginal IRR can
be used to adapt the IRR methodology to this case. п‚— Another problem with the IRR method is that it may give different rates of return. Suppose
there are two discount rates (two IRRs) that make the present value equal to the initial investment. In this case, which rate should be used for
comparison with the cutoff rate? The purpose of this question is not to resolve the cases where there are different IRRs. п‚— Under IRR it is assumed
that all the intermediate cash flows are reinvested at the IRR which always not hold true. Which approach is better п‚— Both NPV and IRR methods
yield better decision–making data based off them being sophisticated capital budgeting techniques and consider time value of money and life time of
the project. п‚— NPV and IRR methods yield better decision–making data based off them being sophisticated capital budgeting techniques as NPV
implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital. п‚—

Essay about Laurentian Bakeries
Question 1: Explain the theoretical rationale for the NPV approach to investment appraisal and compare the strengths and weaknesses of the NPV
approach to two other commonly used approaches. (30 marks)
This first section of this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal
and then compare its strengths and weaknesses to two alternative methods of investment appraisal, those of internal rate of return (IRR) and pay–back.
Theoretical rationale for the NPV approach
The net present value rule or NPV devised by Hirshleifer (1958), is the fundamental model of how firms decide whether to invest in a project,
commonly known as the 'investment decision', or ... Show more content on Helpwriting.net ...
G is also happy to invest because they can borrow against the future payoff of the investment. By investing G gets ВЈ20,000 more to spend today
(ВЈ200,000 less ВЈ180,000). It would pay for either investor to borrow to invest in the opportunity due to the returns on offer.
Despite the reality of known imperfections in capital markets (e.g. taxation, transaction costs, asymmetric information), overall the use of NPV makes
sense as a corporate objective. Certain 'imperfections' can be modelled into financials, providing a more realistic picture. Brealey et al (2008) state
that the use of NPV for uncertain cash flows makes sense too, providing there is free access to competitive capital markets. This is due to when affirm
chooses only positive–NPV projects, they will be meeting the shareholders and firms objective of maximising wealth. Instead of solely seeking a
maximisation of wealth that might negatively impact in other areas (e.g. future profits, return on investment etc), NPV accounts for the time value of
money, opportunity cost of capital and differences in project rates of return.
Comparison of the strengths and weaknesses of the NPV approach to two other commonly used approaches
This report will now focus on comparing the strengths and weaknesses of the NPV approach to two other investment appraisal approaches, internal rate
of return (IRR) and pay–back.
Net present value (NPV)

The NPV approach asks

Company 's Potential Expansion Into The 16 Ounce Bottling...
After careful analysis concerning the company's potential expansion into the 16–ounce bottling machine, the attached spreadsheet and discussion
below highlight three distinct scenarios that produce both unprofitable and profitable outcomes. Provided in the order of a realistic, pessimistic, and
optimistic projections for earnings, a technique known as scenario analysis was implemented. Each scenario's overall level of profit (net present value,
NPV) was calculated and then compared to our internal risk level, which is based on our current capital structure (Ross, Westerfield, Jaffe, & Jordan,
2014). Additionally, break–even analysis was estimated in an attempt to calculate the point of sales in which the profits match the overall cost of the
machine (Ross et al., 2014). Therefore, the ensuing paragraphs first highlight key company–specific and project variables, followed by forecasted
predictions that will play an important role in the decision–making process.
It is important to first note that since NPV is the preferred choice of examining a project here at BBI, we can agree that accepting a project that
generates a positive NPV will benefit stockholders (greater return) as well as increase the overall value of the firm (Ross et al., 2014). Additionally, it
is also essential to supplement our findings by computing our internal rate of return (IRR), which produces the return of a project without any external
factors included (Ross et al., 2014). However, the determining

Financial Validation : Evaluation And Selection Of...
6.6 Financial Validation
What is it?
Financial Validation, as it pertains to Project Management, is the process of evaluating projects to determine their suitability for investment measured
by their quantifiable benefits and return on investment (ROI). This process typically occurs in one step of the project governance process following
project idea generation, but may also be an iterative process that occurs over the project's lifecycle. The iterative approach is usually done to monitor
the results of the project during the execution phase and compare them to the project plan in order to determine if the project is meeting its desired
specifications. Regardless of the method chosen, financial validation is used to ensure the financial impact and effectiveness of the proposed project.
What does it look like? Evaluation and selection of proposals Approval and control of capital expenditures Post–completion audit of investment projects
How to use it?
6.6.1 Evaluation and Selection of Proposals
Once the idea generation phase is complete and the investment proposal has been generated, it is time to evaluate the proposals and select the best
option based on their suitability for investment. There are five different methods of project evaluation, which include net present value (NPV), internal
rate of return (IRR), benefit–cost ratio (profitability index), accounting rate of return (ARR), and payback period.
Net Present Value
Net present value is one of two discounted cash flow

Finance Mini Case Chp11
Mini Case Chapter 11 a. What is capital budgeting? Capital budgeting is the decision process that managers use to identify those projects that add
value to the firm's value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating
projects is critical for a firm's success. Capital budgeting is Analysis of potential additions to fixed assets Long term decisions; involving large
expenditures Very important to a firm's future Define the firm's strategic directions b. What is the difference between independent and mutually
exclusive projects? An independent project is one in which accepting or rejecting one project... Show more content on Helpwriting.net ...
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Capital Expenditure Valuation Methods

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