You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.
You have narrowed your selection down to two choices; (1) Franchise L: Lisa’s Soups, Salads, & Stuff and (2) Franchise S: Sam’s Wonderful Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in year 3 and the forecast of how each franchise will do over the three-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch, while franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds with the franchises directly competing against one another.
Basic terms review
Capital budgeting introduction
Capital budgeting technique
Sensitivity analysis
Scenario analysis
present value
potential difficulties and strength of capital budgeting
Basic terms review
Capital budgeting introduction
Capital budgeting technique
Sensitivity analysis
Scenario analysis
present value
potential difficulties and strength of capital budgeting
Fin 571 guide 1 33) Boeing Corporation is a world leader in commercial aircra...sububhavithra
33) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical __________ decision: whether to develop a new generation of passenger aircraft.
A. payback
B. present value
C. dividend
D. capital budgeting
Why Income Property In Long Beach California ShortBill Stayart
How To Evaluate Residential Income Property 1 to 4 units & Commercial 5units or more. What is GSI & the Gross Multiplier? How do I compute this? Why is this important? What is a 1031 Exchange..? All these questions and more are answered for you in this short slideshare...
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
Fin 571 guide 1 33) Boeing Corporation is a world leader in commercial aircra...sububhavithra
33) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical __________ decision: whether to develop a new generation of passenger aircraft.
A. payback
B. present value
C. dividend
D. capital budgeting
Why Income Property In Long Beach California ShortBill Stayart
How To Evaluate Residential Income Property 1 to 4 units & Commercial 5units or more. What is GSI & the Gross Multiplier? How do I compute this? Why is this important? What is a 1031 Exchange..? All these questions and more are answered for you in this short slideshare...
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
ATHLETE WEAR COMPANY CASE STUDY (75 Marks) Athlete Wear Co. is an Irish sports clothing manufacturer for elite amateur and professional athletes. It has recently seen a decline in profitability owing to increased competition from low cost mass production manufacturers and has been outbid for contracts as official clothing supplier for three major international and domestic sporting events. As a result, Athlete Wear is faced with having to suspend its operations immediately unless it can find alternative markets to ensure the business can r
ESSAYLINK.NET/ORDER
TASK
A) Read the case study below:
SAR Health Services (SARHS) are part of a multi-national enterprise based in Switzerland. They supply sophisticated diagnostic equipment to hospitals across Europe and have recently entered new marks in Asia. SARHS’s relationship with its customers is based on high trust, high quality products and in Europe on 24/7 servicing. The company employs around 3000 staff, consisting of technicians, production, office staff (sales, marketing, distribution) managers and drivers.
SARHS puts particular emphasis on environmental education through staff training and induction. New staff receive a half-day session on sustainability. In addition, monthly departmental meetings in head office include a ‘green slot’ where updates and activities regarding environmental sustainability are discussed. The organisation also runs an internship, which has proved to be a useful source of ideas regarding green initiatives.
TASK
A) Read the case study below:
SAR Health Services (SARHS) are part of a multi-national enterprise based in Switzerland. They supply sophisticated diagnostic equipment to hospitals across Europe and have recently entered new marks in Asia. SARHS’s relationship with its customers is based on high trust, high quality products and in Europe on 24/7 servicing. The company employs around 3000 staff, consisting of technicians, production, office staff (sales, marketing, distribution) managers and drivers.
SARHS puts particular emphasis on environmental education through staff training and induction. New staff receive a half-day session on sustainability. In addition, monthly departmental meetings in head office include a ‘green slot’ where updates and activities regarding environmental sustainability are discussed. The organisation also runs an internship, which has proved to be a useful source of ideas regarding green initiatives.
The company has gone through two reorganisations in the last 3 years. The most recent involved shifting from a functional to a matrix structure. Managers however, have complained that this last structural change confused authority and responsibility relationships.
Group assignment on Business Combinationsvictor okoth
FOR SOLUTION OF THE BELOW CASE STUDIES, VISIT AND ASK IT AT ESSAYTUTORS.NET
Group assignment on Business Combinations
Case .1
You have been engaged to audit the financial statements of Solamente Corporation for thefiscal year ended May 31, 2010. You discover that on June 1, 2009, Mika Company hadbeen merged into Solamente in a business combination. You also find that both Solamenteand Mika (prior to its liquidation) incurred legal fees, accounting fees, and printing costsfor the business combination; both companies debited those costs to an intangible assetledger account entitled “Cost of Business Combination.” In its journal entry to record thebusiness combination with Mika, Solamente increased its Cost of Business Combinationaccount by an amount equal to the balance of Mika’s comparable ledger account.
Instructions
Evaluate Solamente’s accounting for the out-of-pocket costs of the business combination with Mika in light of IFRS and GAAP guidelines.
Case .2
You are the controller of Software Company, a distributor of computer software, which isplanning to acquire a portion of the net assets of a product line of Midge Company, a competitorenterprise. The projected acquisition cost is expected to exceed substantially the currentfair value of the identifiable net assets to be acquired, which the competitor has agreedto sell because of its substantial net losses of recent years. The board of directors of Softwareasks if the excess acquisition cost may appropriately be recognized as goodwill.
Instructions
Prepare a memorandum to the board of directors an answer to the question, after consulting the guidelines issued by either FASB or IASB
Case .3
On February 15, 2005, officers of Sun Corporation agreed with George Merlo, sole stockholderof Merlo Company and Merlo Industries, Inc., to acquire all his common stock ownershipin the two companies as follows:
1. 10,000 shares of Shane’s $1 par common stock (current fair value $30 a share) would be issued to George Merlo on February 28, 2005, for his 1,000 shares of $10 par common stock of Merlo Company. In addition, 20,000 shares of Sun common stock would be issued to George Merlo on February 28, 2010, if aggregate net income of Merlo Company for the five-year period then ended exceeded $300,000.
https://theacademicessays.com/downloads/solution-cis-534-advanced-networking-design-term-paper-project-designing-secure-network-complete-solution/
Project: Designing a Secure Network
This term paper involves putting together the various concepts learned throughout this course. You are tasked with designing the most secure network possible, keeping in mind your goal of supporting three (3) IT services: email, file transfer (centralized), and VPN. Your first step is to design a single network capable of supporting there three (3) different services. Once you have fully designed your network, you will need to provide three (3) workflow diagrams explaining how your designed network handles the three (3) different transactions. The first is an internal user sending an email using his / her corporate email address to a user on the Yahoo domain with an arbitrary address of user534@yahoo.com. The second workflow diagram should show a user initiating an FTP session from inside your network to the arbitrary site of ftp.netneering.com. The third workflow is an externally located employee initiating a VPN session to corporate in order to access files on the Windows desktop computer, DT-Corp534-HellenS, at work.
Write a ten to fifteen (10-15) page paper in which you complete the following three (3) Parts. Note: Please use the following page breakdown to complete your assignment:
Overall network diagram: One (1) page
Datapath diagrams: Three (3) pages (one for each diagram)
Write-up: six to ten (6-10) pages
Part 1
Using Microsoft Visio or its open source alternative, create a diagram showing the overall network you’ve designed from the user or endpoint device to the Internet cloud, and everything in between, in which you:
o Follow the access, core, distribution layer model.
o Include at a minimum:
Authentication server (i.e. Microsoft Active Directory)
Routers
Switches (and / or hubs)
DOWNLOAD HERE
https://theacademicessays.com/downloads/solution-mkt-421-complete-courses-mkt-421-week-1-understanding-marketing-and-customer-relationships/
MKT 421 COMPLETE COURSES
MKT 421 Week 1 Understanding Marketing and Customer Relationships
Purpose of Assignment
Understanding marketing as a multi-step process relying on building successful customer relationships is essential to helping organizations grow and achieve their goals. This assignment defines marketing, the customer value proposition, and creating mutually beneficial relationships between the organization and target, as well as applies these concepts to the student to create a personal brand.
Assignment Steps
Resources: Week 1 textbook reading, Week 1 video, American Marketing Association Website, and University Career Center: Crafting Your Image
Scenario: You have just graduated from the University of Phoenix with your Bachelor’s Degree. You have decided either to seek a promotion at your current work, explore new career opportunities, or open your own business and are using your marketing knowledge to position yourself for career growth.
Develop at least a 1,050 word response to the following using the scenario above:
Provide a definition of marketing from the American Marketing Association. Define the customer value proposition. Discuss the differences between the marketing process and advertising, the goals of creating a strong customer value proposition, and the unique relationship that exists between company and customer.
Use your workplace, a company you would like to work for, or an entrepreneurial vision and apply the concepts of the customer value proposition and relationship marketing to their operations. Introduce who the company, or business idea is and what they do. Provide examples demonstrating how the company uses these concepts successfully. Are there any ways they can improve in these areas? How?
Determine how your own personal brand links to the organization’s customer value proposition. Discuss ways you can integrate a customer value proposition and use relationship marketing to position yourself the best. Please share examples to illustrate your thoughts and reasoning.
Cite a minimum of two peer-reviewed sources with at least one coming from the textbook, the Week 1 video, or the University Librar
Unit II Essay Identify the major stakeholders in your organization (or one wi...victor okoth
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https://theacademicessays.com/downloads/solution-unit-ii-essay-identify-major-stakeholders-organization-one-familiar-analyze-top-management-structure-explained-chapter-2/
Unit II Essay
Identify the major stakeholders in your organization (or one with which you are familiar). Analyze the top-management structure (as explained in Chapter 2), investigate and enumerate the code of ethics (written or not written), and explain the ethical stance of all stakeholders involved in the organization. Identify the relationship among any reward systems and organizational goals and what positive or negative effect there is on employee productivity. Cite concepts and ideas from Chapter 2 to compliment your work.
Your paper should be at least two pages in length, not including the title page or reference page. You are required to use at least Chapter 2 of your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations in the proper APA format.
Information about accessing the Blackboard Grading Rubric for this assignment is provided below.
Spss Homework Psyc 421
SPSS Assignment Part 1 Instructions
Describing a Normative Sample
When it comes to the use of psychological tests, one approach that both researchers and clinicians take in trying to understand participants’ performance is a norm-referenced approach. With a norm-referenced test, the test is given to a large, representative group of participants known as the “normative sample” (a.k.a. “norm group”). Then, the scores of all subsequent test-takers are compared to the scores of the norm group. In order for the norm group to be a valid comparison group, it has to be representative of the population who will be taking the test.
So how do we know if the normative sample is representative? When summarizing the psychometric properties of a test, test developers and publishers usually describe the norm group with their demographic variables. Demographic variables are characteristics of the participants like: gender, age, ethnicity, relationship status, socioeconomic status, religious affiliation etc. A description of the normative sample allows examinersto decide if the test of interest can be used with their intended examinees. For example, if the normative sample were 95% male, then you likely could not logically compare their scores to females test takers! That is why readers need to know what the normative sample looks like.
The purpose of the current assignment is for you to provide a verbal (and graphical)description of a fictional normative sample of research participants.
In the Assignment Instructions folder, there is an SPSS data file that will be the basis for your analyses. The data provided are fictional and were created solely for the purposes of our SPSS assignments. This data file includes: 1) demographic information for a normative sample of 428 participants, and 2) participants’ scores on a test called the Center for Epidemiologic Studies Depression Scale (CES-D scale).
The CES-D Scale is utilized to measure symptoms of depression. It is a self-assessment that is completed by the individual. The CES-D contains 20items rated on a 4-point scale (0 = Rarely or None of the Time to 3
research methods and ethical implications of a social psychology studyvictor okoth
GET ANSWER HERE
http://theacademicessays.com/?p=356
In this assignment, you will write an essay about the research methods and ethical implications of a social psychology study. You will get information about the study from one of the entries in the SPARQ "Solutions Catalog", which is a web site maintained by Stanford University at https://sparq.stanford.edu/solutions?&&. SPARQ is an acronym for "Social Psychological Answers to Real-world Questions." Each entry in the Solutions Catalog names a problem, and then offers a solution to that problem, based on a research study in social psychology.
To keep this assignment short and manageable, your only sources for this assignment should be from the SPARQ site and your course materials, such as your textbook. There is no need for you to cite any of the course materials. Therefore, no additional citations or references are needed, beyond those from the SPARQ site.
In this exercise, you will choose one of the entries in the SPARC site, and then write a two to three (2-3) page paper that meets the following requirements.
1. Begin your paper with a short introductory statement that clearly identifies the article from the SPARQ site that you are using, as well as the corresponding research article. Model your statement after the following example:
https://www.homeworkmarket.com/content/eco-365-entire-and-complete-course
ECO 365 Entire And Complete Course
ECO 365 Week 5 Theory of Consumer Choice and Frontiers of Microeconomics (2)
You have been asked to assist your organization’s marketing department to better understand how consumers make economic decisions.
Develop a 12- to 15-slide Microsoft® PowerPoint® presentation to be presented to the Marketing Department that addresses the followin
Term Paper: Virtualization
Due Week 10 and worth 210 points
This assignment contains two (2) sections: Written Report and PowerPoint Presentation. You must submit both sections as separate files for the completion of this assignment. Label each file name according to the section of the assignment it is written for. Additionally, you may create and / or assume all necessary assumptions needed for the completion of this assignment.
According to a TechRepublic survey performed in 2013, (located at http://www.techrepublic.com/blog/data-center/research-desktop-virtualization-growing-in-popularity/# desktop virtualization is growing in popularity. Use the Internet and Strayer Library to research this technique. Research the top three (3) selling brands of virtualization software.
Imagine that the Chief Technology Officer (CTO
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Embracing GenAI - A Strategic ImperativePeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
• The Committee on Ways and Means has been investigating several universities since November 15, 2023, when the Committee held a hearing entitled From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing. The Committee followed the hearing with letters to those institutions on January 10, 202
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
1. Chapter 11(12ed)-10
The Basics of Capital Budgeting
Evaluating Cash Flows
MINI-CASE
You have just graduated from the MBA program of a large university, and one of your
favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have
decided you want to “be your own boss.” While you were in the master’s program, your
grandfather died and left you $300,000 to do with as you please. You are not an inventor
and you do not have a trade skill that you can market; however, you have decided that you
would like to purchase at least one established franchise in the fast foods area, maybe two
(if profitable). The problem is that you have never been one to stay with any project for
too long, so you figure that your time frame is three years. After three years you will sell
off your investment and go on to something else.
You have narrowed your selection down to two choices; (1) Franchise L: Lisa’s Soups,
Salads, & Stuff and (2) Franchise S: Sam’s Wonderful Fried Chicken. The net cash flows
shown below include the price you would receive for selling the franchise in year 3 and the
forecast of how each franchise will do over the three-year period. Franchise L’s cash flows
will start off slowly but will increase rather quickly as people become more health
conscious, while Franchise S’s cash flows will start off high but will trail off as other
chicken competitors enter the marketplace and as people become more health conscious
and avoid fried foods. Franchise L serves breakfast and lunch, while franchise S serves
only dinner, so it is possible for you to invest in both franchises. You see these franchises as
perfect complements to one another: you could attract both the lunch and dinner crowds
and the health conscious and not so health conscious crowds with the franchises directly
competing against one another.
Here are the projects' net cash flows (in thousands of dollars):
Expected Net Cash Flow
Year Franchise L Franchise S
0 ($100) ($100)
1 10 70
2 60 50
3 80 20
Depreciation, salvage values, net working capital requirements, and tax effects are all
included in these cash flows.
Mini Case: 10 - 1
2. You also have made subjective risk assessments of each franchise, and concluded that
both franchises have risk characteristics that require a return of 10 percent. You must
now determine whether one or both of the projects should be accepted.
a. What is capital budgeting?
Answer: Capital budgeting is the process of analyzing additions to fixed assets. Capital
budgeting is important because, more than anything else, fixed asset investment
decisions chart a company's course for the future. Conceptually, the capital budgeting
process is identical to the decision process used by individuals making investment
decisions. These steps are involved:
1. Estimate the cash flows--interest and maturity value or dividends in the case of
bonds and stocks, operating cash flows in the case of capital projects.
2. Assess the riskiness of the cash flows.
3. Determine the appropriate discount rate, based on the riskiness of the cash flows
and the general level of interest rates. This is called the project cost of capital in
capital budgeting.
4. Evaluate the cash flows.
b. What is the difference between independent and mutually exclusive projects?
Answer: Projects are independent if the cash flows of one are not affected by the acceptance of
the other. Conversely, two projects are mutually exclusive if acceptance of one
impacts adversely the cash flows of the other; that is, at most one of two or more such
projects may be accepted. Put another way, when projects are mutually exclusive it
means that they do the same job. For example, a forklift truck versus a conveyor
system to move materials, or a bridge versus a ferry boat.
Projects with normal cash flows have outflows, or costs, in the first year (or years)
followed by a series of inflows. Projects with nonnormal cash flows have one or
more outflows after the inflow stream has begun. Here are some examples:
Mini Case: 10 - 2
3. Inflow (+) Or Outflow (-) In Year
0 1 2 3 4 5
Normal - + + + + +
- - + + + +
- - - + + +
Nonnormal - + + + + -
- + + - + -
+ + + - - -
c. 1. What is the payback period? Find the paybacks for franchises L and S.
Answer: The payback period is the expected number of years required to recover a project's
cost. We calculate the payback by developing the cumulative cash flows as shown
below for project l (in thousands of dollars):
Expected NCF
Year Annual Cumulative
0 ($100) ($100)
1 10 (90)
2 60 (30)
3 80 50
0 1 2 3
| | | |
-100 10 60 80
-90 -30 +50
Franchise L's $100 investment has not been recovered at the end of year 2, but it has
been more than recovered by the end of year 3. Thus, the recovery period is between
2 and 3 years. If we assume that the cash flows occur evenly over the year, then the
investment is recovered $30/$80 = 0.375 ≈ 0.4 into year 3. Therefore, paybackL = 2.4
years. Similarly, paybackS = 1.6 years.
c. 2. What is the rationale for the payback method? According to the payback
criterion, which franchise or franchises should be accepted if the firm's
maximum acceptable payback is 2 years, and if franchises L and S are
independent? If they are mutually exclusive?
Answer: Payback represents a type of "breakeven" analysis: the payback period tells us when
the project will break even in a cash flow sense. With a required payback of 2 years,
franchise S is acceptable, but franchise L is not. Whether the two projects are
independent or mutually exclusive makes no difference in this case.
Mini Case: 10 - 3
Payback is between t = 2 and t
= 3
4. c. 3. What is the difference between the regular and discounted payback periods?
Answer: Discounted payback is similar to payback except that discounted rather than raw cash
flows are used.
Setup for franchise L's discounted payback, assuming a 10% cost of capital:
Expected Net Cash Flows
Year Raw Discounted Cumulative
0 ($100) ($100.00) ($100.00)
1 10 9.09 (90.91)
2 60 49.59 (41.32)
3 80 60.11 18.79
Discounted PaybackL = 2 + ($41.32/$60.11) = 2.69 = 2.7 years.
Versus 2.4 years for the regular payback.
c. 4. What is the main disadvantage of discounted payback? Is the payback method
of any real usefulness in capital budgeting decisions?
Answer: Regular payback has two critical deficiencies: (1) it ignores the time value of money,
and (2) it ignores the cash flows that occur after the payback period. Discounted
payback does consider the time value of money, but it still fails to consider cash flows
after the payback period; hence it has a basic flaw. In spite of its deficiency, many
firms today still calculate the discounted payback and give some weight to it when
making capital budgeting decisions. However, payback is not generally used as the
primary decision tool. Rather, it is used as a rough measure of a project's liquidity
and riskiness.
Mini Case: 10 - 4
5. d. 1. Define the term net present value (NPV). What is each franchise's NPV?
Answer: The net present value (NPV) is simply the sum of the present values of a project's
cash flows:
NPV = ∑
= +
n
0t
t
t
)r1(
CF
.
Franchise L'S NPV is $18.79:
0 1 2 3
| | | |
(100.00) 10 60 80
9.09
49.59
60.11
18.79 = NPVL
NPVs are easy to determine using a calculator with an NPV function. Enter the cash
flows sequentially, with outflows entered as negatives; enter the cost of capital; and
then press the NPV button to obtain the project's NPV, $18.78 (note the penny
rounding difference). The NPV of franchise S is NPVS = $19.98.
Mini Case: 10 - 5
10%
6. d. 2. What is the rationale behind the NPV method? According to NPV, which
franchise or franchises should be accepted if they are independent? Mutually
exclusive?
Answer: The rationale behind the NPV method is straightforward: if a project has NPV = $0,
then the project generates exactly enough cash flows (1) to recover the cost of the
investment and (2) to enable investors to earn their required rates of return (the
opportunity cost of capital). If NPV = $0, then in a financial (but not an accounting)
sense, the project breaks even. If the NPV is positive, then more than enough cash
flow is generated, and conversely if NPV is negative.
Consider franchise L's cash inflows, which total $150. They are sufficient (1) to
return the $100 initial investment, (2) to provide investors with their 10 percent
aggregate opportunity cost of capital, and (3) to still have $18.79 left over on a
present value basis. This $18.79 excess PV belongs to the shareholders--the
debtholders' claims are fixed, so the shareholders' wealth will be increased by $18.79
if franchise L is accepted. Similarly, Axis's shareholders gain $19.98 in value if
franchise S is accepted.
If franchises L and S are independent, then both should be accepted, because they
both add to shareholders' wealth, hence to the stock price. If the franchises are
mutually exclusive, then franchise S should be chosen over L, because s adds more to
the value of the firm.
d. 3. Would the NPVs change if the cost of capital changed?
Answer: The NPV of a project is dependent on the cost of capital used. Thus, if the cost of
capital changed, the NPV of each project would change. NPV declines as r increases,
and NPV rises as r falls.
Mini Case: 10 - 6
7. e. 1. Define the term Internal Rate Of Return (IRR). What is each franchise's IRR?
Answer: The internal rate of return (IRR) is that discount rate which forces the NPV of a
project to equal zero:
0 1 2 3
| | | |
CF0 CF1 CF2 CF3
PVCF1
PVCF2
PVCF3
0 = SUM OF PVs = NPV.
Expressed as an equation, we have:
IRR: ∑
= +
n
0t
t
t
)IRR1(
CF
= $0 = NPV.
Note that the IRR equation is the same as the NPV equation, except that to find the
IRR the equation is solved for the particular discount rate, IRR, which forces the
project's NPV to equal zero (the IRR) rather than using the cost of capital (r) in the
denominator and finding NPV. Thus, the two approaches differ in only one respect:
in the NPV method, a discount rate is specified (the project's cost of capital) and the
equation is solved for NPV, while in the IRR method, the NPV is specified to equal
zero and the discount rate (IRR) which forces this equality is found.
Franchise L's IRR is 18.1 percent:
0 1 2 3
| | | |
-100.00 10 60 80
8.47
43.02
48.57
$ 0.06 ≈ $0 if IRRL = 18.1% is used as the discount rate.
therefore, IRRL ≈ 18.1%.
A financial calculator is extremely helpful when calculating IRRs. The cash flows
are entered sequentially, and then the IRR button is pressed. For franchise S, IRRS ≈
23.6%. Note that with many calculators, you can enter the cash flows into the cash
flow register, also enter r = i, and then calculate both NPV and IRR by pressing the
appropriate buttons.
Mini Case: 10 - 7
IRR
18.1%
8. e. 2. How is the IRR on a project related to the YTM on a bond?
Answer: The IRR is to a capital project what the YTM is to a bond. It is the expected rate of
return on the project, just as the YTM is the promised rate of return on a bond.
e. 3. What is the logic behind the IRR method? According to IRR, which franchises
should be accepted if they are independent? Mutually exclusive?
Answer: IRR measures a project's profitability in the rate of return sense: if a project's IRR
equals its cost of capital, then its cash flows are just sufficient to provide investors
with their required rates of return. An IRR greater than r implies an economic profit,
which accrues to the firm's shareholders, while an IRR less than r indicates an
economic loss, or a project that will not earn enough to cover its cost of capital.
Projects' IRRs are compared to their costs of capital, or hurdle rates. Since
franchises L and S both have a hurdle rate of 10 percent, and since both have IRRs
greater than that hurdle rate, both should be accepted if they are independent.
However, if they are mutually exclusive, franchise S would be selected, because it has
the higher IRR.
e. 4. Would the franchises' IRRs change if the cost of capital changed?
Answer: IRRs are independent of the cost of capital. Therefore, neither IRRS nor IRRL would
change if r changed. However, the acceptability of the franchises could change--L
would be rejected if r were above 18.1%, and S would also be rejected if r were above
23.6%.
f. 1. Draw NPV profiles for franchises L and S. At what discount rate do the profiles
cross?
Answer: the NPV profiles are plotted in the figure below.
Note the following points:
1. The y-intercept is the project's NPV when r = 0%. This is $50 for L and $40 for
S.
2. The x-intercept is the project's IRR. This is 18.1 percent for l and 23.6 percent for
S.
Mini Case: 10 - 8
9. 3. NPV profiles are curves rather than straight lines. To see this, note that these
profiles approach cost = -$100 as r approaches infinity.
4. From the figure below, it appears that the crossover point is between 8 and 9
percent. The precise value is approximately 8.7 percent. One can calculate the
crossover rate by (1) going back to the data on the problem, finding the cash flow
differences for each year, (2) entering those differences into the cash flow
register, and (3) pressing the IRR button to get the crossover rate, 8.68% ≈ 8.7%.
r NPVL NPVS
0% $50 $40
5 33 29
10 19 20
15 7 12
20 (4) 5
Mini Case: 10 - 9
-10
0
10
20
30
40
50
60
0 5 10 15 20 23.6
10. f. 2. Look at your NPV profile graph without referring to the actual NPVs and IRRs.
Which franchise or franchises should be accepted if they are independent?
Mutually exclusive? Explain. Are your answers correct at any cost of capital
less than 23.6 percent?
Answer: The NPV profiles show that the IRR and NPV criteria lead to the same accept/reject
decision for any independent project. Consider franchise L. It intersects the x-axis at
its IRR, 18.1 percent. According to the IRR rule, L is acceptable if r is less than 18.1
percent. Also, at any r less than 18.1 percent, L's NPV profile will be above the x
axis, so its NPV will be greater than $0. Thus, for any independent project, NPV and
IRR lead to the same accept/reject decision.
Now assume that L and S are mutually exclusive. In this case, a conflict might
arise. First, note that IRRS = 23.6% > 18.1% = therefore, regardless of the size of r,
project S would be ranked higher by the IRR criterion. However, the NPV profiles
show that NPVL > NPVS if r is less than 8.7 percent. Therefore, for any r below the
8.7% crossover rate, say r = 7 percent, the NPV rule says choose L, but the IRR rule
says choose S. Thus, if r is less than the crossover rate, a ranking conflict occurs.
g. 1. What is the underlying cause of ranking conflicts between NPV and IRR?
Answer: For normal projects' NPV profiles to cross, one project must have both a higher
vertical axis intercept and a steeper slope than the other. A project's vertical axis
intercept typically depends on (1) the size of the project and (2) the size and timing
pattern of the cash flows--large projects, and ones with large distant cash flows,
would generally be expected to have relatively high vertical axis intercepts. The
slope of the NPV profile depends entirely on the timing pattern of the cash flows--
long-term projects have steeper NPV profiles than short-term ones. Thus, we
conclude that NPV profiles can cross in two situations: (1) when mutually exclusive
projects differ in scale (or size) and (2) when the projects' cash flows differ in terms
of the timing pattern of their cash flows (as for franchises L and S).
g. 2. What is the "reinvestment rate assumption”, and how does it affect the NPV
versus IRR conflict?
Answer: The underlying cause of ranking conflicts is the reinvestment rate assumption. All
DCF methods implicitly assume that cash flows can be reinvested at some rate,
regardless of what is actually done with the cash flows. Discounting is the reverse of
compounding. Since compounding assumes reinvestment, so does discounting. NPV
and IRR are both found by discounting, so they both implicitly assume some discount
rate. Inherent in the NPV calculation is the assumption that cash flows can be
reinvested at the project's cost of capital, while the IRR calculation assumes
reinvestment at the IRR rate.
Mini Case: 10 - 10
11. g. 3. Which method is the best? Why?
Answer: Whether NPV or IRR gives better rankings depends on which has the better
reinvestment rate assumption. Normally, the NPV's assumption is better. The reason
is as follows: a project's cash inflows are generally used as substitutes for outside
capital, that is, projects' cash flows replace outside capital and, hence, save the firm
the cost of outside capital. Therefore, in an opportunity cost sense, a project's cash
flows are reinvested at the cost of capital. To see this graphically, think of the
following situation: assume the firm's cost of capital is a constant 10% within the
relevant range of financing considered, and it has projects available as shown in the
graph below:
Mini Case: 10 - 11
P e r c e n t
D o l l a r s R a i s e d a n d I n v e s t e d
M C C
I R R A = 2 5 %
I R R B = 2 0 %
I R R C = 1 5 %
I R R D = 1 2 %
I R R E = 8 %
I R R F = 5 %5
2 0
2 5
1 5
1 0
12. What projects will be accepted, by either NPV or IRR? Projects A, B, C, and D.
If the same situation exists year after year, at what rate of return will cash flows
from earlier years' investments be reinvested? Capital budgeting decisions are made
in this sequence: (1) the company would say, "we can take on A, B, C, and D and
finance them with 10% money, so let's do it." (2) then, it would get cash flows from
earlier years' projects. What would it do with those cash flows? It would use them in
lieu of raising money that costs 10%, so it would save 10%. Therefore, 10% is the
opportunity cost of the cash flows. In effect, cash flows are reinvested at the 10%
cost of capital.
Note, however, that NPV and IRR always give the same accept/reject decisions
for independent projects, so IRR can be used just as well as NPV when independent
projects are being evaluated. The NPV versus IRR conflict arises only if mutually
exclusive projects are involved.
h. 1. Define the term Modified IRR (MIRR). Find the MIRRs for franchises L and S.
Answer: MIRR is that discount rate which equates the present value of the terminal value of
the inflows, compounded at the cost of capital, to the present value of the costs. Here
is the setup for calculating franchise L's modified IRR:
0 1 2 3
| | | |
PV Of Costs = (100.00) 10 60 80.00
66.00
12.10
TV OF INFLOWS = 158.10
PV Of TV = 100.00
= $100 = 3
)MIRR1(
10.158$
+
.
PV costs = n
)MIRR1(
TV
+
= ∑
= +
n
0t
t
t
)r1(
COF
=
n
n
1t
tn
t
)MIRR1(
)r1(CIF
+
+∑
=
−
.
After you calculate the TV, enter n = 3, PV = -100, pmt = 0, fv = 158.1, and then
press i to get the answer, MIRRL = 16.5%. We could calculate MIRRS similarly: =
16.9%. Thus, franchise S is ranked higher than L. This result is consistent with the
NPV decision.
Mini Case: 10 - 12
MIRR = ?
r = 10%
13. h. 2. What are the MIRR's advantages and disadvantages vis-a-vis the regular IRR?
What are the MIRR's advantages and disadvantages vis-a-vis the NPV?
Answer: MIRR is a better rate of return measure than IRR for two reasons: (1) it correctly
assumes reinvestment at the project's cost of capital rather than at its IRR. (2) MIRR
avoids the problem of multiple IRRs--there can be only one MIRR for a given
project.
MIRR does not always lead to the same decision as NPV when mutually
exclusive projects are being considered. In particular, small projects often have a
higher MIRR, but a lower NPV, than larger projects. Thus, MIRR is not a perfect
substitute for NPV, and NPV remains the single best decision rule. However, MIRR
is superior to the regular IRR, and if a rate of return measure is needed, MIRR should
be used.
Business executives agree. As noted in the text, business executives prefer to
compare projects' rates of return to comparing their NPVs. This is an empirical fact.
As a result, financial managers are substituting MIRR for IRR in their discussions
with other corporate executives. This fact was brought out in the October 1989 FMA
meetings, where executives from Du Pont, Hershey, and Ameritech, among others, all
reported a switch from IRR to MIRR.
i. As a separate project (project P), you are considering sponsoring a pavilion at
the upcoming world's fair. The pavilion would cost $800,000, and it is expected
to result in $5 million of incremental cash inflows during its 1 year of operation.
However, it would then take another year, and $5 million of costs, to demolish
the site and return it to its original condition. Thus, project P's expected net
cash flows look like this (in millions of dollars):
Year Net Cash Flows
0 ($0.8)
1 5.0
2 (5.0)
The project is estimated to be of average risk, so its cost of capital is 10 percent.
i. 1. What are normal and nonnormal cash flows?
Answer: Normal cash flows begin with a negative cash flow (or a series of negative cash
flows), switch to positive cash flows, and then remain positive. They have only one
change in sign. (Note: normal cash flows can also start with positive cash flows,
switch to negative cash flows, and then remain negative.) Nonnormal cash flows
have more than one sign change. For example, they may start with negative cash
flows, switch to positive, and then switch back to negative.
Mini Case: 10 - 13
14. i. 2. What is project P’s NPV? What is its IRR? Its MIRR?
Answer: Here is the time line for the cash flows, and the NPV:
0 1 2
| | |
-800,000 5,000,000 -5,000,000
NPVP = -$386,776.86.
We can find the NPV by entering the cash flows into the cash flow register, entering i
= 10, and then pressing the NPV button. However, calculating the IRR presents a
problem. With the cash flows in the register, press the IRR button. An hp-10b
financial calculator will give the message "error-soln." This means that project P has
multiple IRRs. An HP-17B will ask for a guess. If you guess 10%, the calculator
will produce IRR = 25%. If you guess a high number, such as 200%, it will produce
the second IRR, 400%1
. The MIRR of project P = 5.6%, and is found by computing
the discount rate that equates the terminal value ($5.5 million) to the present value of
cost ($4.93 million).
1 Looking at the figure below, if you guess an IRR to the left of the peak NPV rate, the lower IRR will
appear. If you guess IRR > peak NPV rate, the higher IRR will appear.
Mini Case: 10 - 14
10%
15. 125
250
375
500
-125
-250
-375
100 200 300 400 500 600
Cost of Capital, r (%)
NPV
i. 3. Draw project P's NPV profile. Does project P have normal or non-normal cash
flows? Should this project be accepted?
Answer: You could put the cash flows in your calculator and then enter a series of i values, get
an NPV for each, and then plot the points to construct the NPV profile. We used a
spreadsheet program to automate the process and then to draw the profile. Note that
the profile crosses the x-axis twice, at 25% and at 400%, signifying two IRRs. Which
IRR is correct? In one sense, they both are--both cause the project's NPV to equal
zero. However, in another sense, both are wrong--neither has any economic or
financial significance.
Project P has nonnormal cash flows; that is, it has more than one change of signs
in the cash flows. Without this nonnormal cash flow pattern, we would not have the
multiple IRRs.
Since project P's NPV is negative, the project should be rejected, even though
both IRRs (25% and 400%) are greater than the project's 10 percent cost of capital.
The MIRR of 5.6% also supports the decision that the project should be rejected.
Mini Case: 10 - 15
16. j. In an unrelated analysis, you have the opportunity to choose between the
following two mutually exclusive projects:
Expected Net Cash Flows
Year Project S Project L
0 ($100,000) ($100,000)
1 60,000 33,500
2 60,000 33,500
3 -- 33,500
4 -- 33,500
The projects provide a necessary service, so whichever one is selected is expected
to be repeated into the foreseeable future. Both projects have a 10 percent cost
of capital.
j. 1. What is each project's initial npv without replication?
Answer: The NPVs, found with a financial calculator, are calculated as follows:
Input the following: CF0 = -100000, CF1 = 60000, NJ = 2, AND I = 10 to solve
for NPVS = $4,132.23 ≈ $4,132.
Input the following: CF0 = -100000, CF1 = 33500, NJ = 4, AND I = 10 to solve
for NPVL = $6,190.49 ≈ $6,190.
However, if we make our decision based on the raw NPVs, we would be biasing
the decision against the shorter project. Since the projects are expected to be
replicated, if we initially choose project S, it would be repeated after 2 years.
However, the raw NPVs do not reflect the replication cash flows.
Mini Case: 10 - 16
17. j. 2. Now apply the replacement chain approach to determine the projects’ extended
NPVs. Which project should be chosen?
Answer: The simple replacement chain approach assumes that the projects will be replicated
out to a common life. Since project S has a 2-year life and L has a 4-year life, the
shortest common life is 4 years. Project L's common life NPV is its raw NPV:
Common Life NPVL = $6,190.
However, project S would be replicated in year 2, and if we assume that the replicated
project's cash flows are identical to the first set of cash flows, then the replicated NPV
is also $4,132, but it "comes in" in year 2. We can put project S's cash flow situation
on a time line:
0 1 2 3 4
| | | | |
4,132 4,312
3,415
7,547
Here we see that S's common life NPV is NPVS = $7,547.
Thus, when compared over a 4-year common life, project s has the higher NPV,
hence it should be chosen. Project s would have the higher NPV over any common
life.
j. 3. Now assume that the cost to replicate project S in 2 years will increase to
$105,000 because of inflationary pressures. How should the analysis be handled
now, and which project should be chosen?
Answer: If the cost of project S is expected to increase, the replication project is not identical
to the original, and the EAA approach cannot be used. In this situation, we would put
the cash flows on a time line as follows:
0 1 2 3 4
| | | | |
-100,000 60,000 60,000 60,000 60,000
-105,000
- 45,000
Common Life NPVS = $3,415.
With this change, the common life NPV of project s is less than that for project
L, and hence project L should be chosen.
Mini Case: 10 - 17
10%
r = 10%
18. k. You are also considering another project which has a physical life of 3 years;
that is, the machinery will be totally worn out after 3 years. However, if the
project were terminated prior to the end of 3 years, the machinery would have a
positive salvage value. Here are the project’s estimated cash flows:
Initial Investment End-Of-Year
And Operating Net Salvage
Year Cash Flows Value_
0 ($5,000) $5,000
1 2,100 3,100
2 2,000 2,000
3 1,750 0
Using the 10 percent cost of capital, what is the project’s NPV if it is operated
for the full 3 years? Would the NPV change if the company planned to
terminate the project at the end of year 2? At the end of year 1? What is the
project’s optimal (economic) life?
Answer: Here are the time lines for the 3 alternative lives:
No termination:
0 1 2 3
| | | |
-5,000 2,100 2,000 1,750
0
1,750
NPV = -$123.
Terminate after 2 years:
0 1 2
| | |
-5,000 2,100 2,000
2,000
Mini Case: 10 - 18
10%
10%
19. 4,000
NPV = $215.
Terminate after 1 year:
0 1
| |
-5,000 2,100
3,100
5,200
NPV = -$273.
We see (1) that the project is acceptable only if operated for 2 years, and (2) that a
project's engineering life does not always equal its economic life.
l. After examining all the potential projects, you discover that there are many
more projects this year with positive NPVs than in a normal year. What two
problems might this extra large capital budget cause?
You only have a limited amount of capital to commit to projects. If you have to raise
external capital to fund some of these other positive NPV projects, then you may be
faced with an increasing cost of capital. This is called an increasing marginal cost of
capital schedule, and it also happens to companies when they exhaust their internal
sources of funds and have to go to external capital markets for their finding. This
increased cost of capital may cause you to reject projects that you might otherwise
accept because with your increased cost of capital, some projects may be negative
NPV when they would otherwise be positive NPV in a normal year.
Another effect of this large capital budget is that you may choose to ration capital—
i.e. not fund all of the projects. This is called capital rationing, and companies and
investors do this when for whatever reason they put a cap on the funds they are
willing to invest in new projects.
Mini Case: 10 - 19
10%