11.04.2010 Chapter 10. Mini Case Situation
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 $1 million 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
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The rationale behind that assertion arises from the idea that all such projects add wealth, and that should be the overall goal of the manager in all respects. If strictly using the NPV method to evaluate two mutually exclusive projects, you would want to accept the project that adds the most value (i.e. the project with the higher NPV). Hence, if considering the above two projects, you would accept both projects if they are independent, and you would only accept Project S if they are mutually exclusive.
(3.) Would the NPVs change if the cost of capital changed? Answer: See Chapter 10 Mini Case Show d. (1.) Define the term internal rate of return (IRR). What is each franchise 's IRR? Internal Rate of Return (IRR)
The internal rate of return is defined as the discount rate that equates the present value of a project 's cash inflows to its outflows. It is the discount rate that forces the PV of the inflows to equal the initial cost. In other words, the internal rate of return is the interest rate that forces NPV to zero. The calculation for IRR can be tedious, but Excel provides an IRR function that merely requires you to access the function and enter the array of cash
Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the
We should Exhibit 6 with Exhibit 7, beacuse the last one considers an inflation of 11%; also Exhibit 8 can help us to obtain the Rm and Rf.
IRR is the rate at which the net present value becomes zero (Ross, Westerfield & Jordan, 2013). Additionally, IRR is calculated first by determining the Net Present Value. The Net Present Value is the variance concerning the market value and its cost (Ross, Westerfield & Jordan, 2013). Net present value is calculated by first finding the present value. For instance, 21.83 million (year 1 revenue from above) divided by 1 plus the companies rate of return of 12%. Thus, 21.83/(1+.12)= 19.49 is the present value for year 1. Furthermore, by adding the total revenue over the next 5 years we get 21.85+ 28.025+36.875+30.975+23.6=132.325 million is the expected value of revenue. That amount now needs to be placed into the present value equation previously discussed only this time with the exponent of 5 to cover the next 5 years. 132.325/(1+.12)^5=75.08 (rounded). Moreover, if
Do you ever think to yourself, “I really wish I could be my own boss.”? I have thought about that goal for years now, trying to figure out what it is I need to do to accomplish it. After working in restaurants for the past four years of my life, I have always seen myself owning my own. I have seen the proper ways of how to manage a successful restaurant, and I have also seen the ways to completely run a restaurant into the ground. I have seen everything from improper communication, to poor teamwork and I strive to be on the opposite end of those aspects.
(b) What is the NPV for both projects? If the company applies the NPV decision rule, which project should it take?
The two projects, Merseyside and Rotterdam, are mutually exclusive because accepting one project will result in a higher level of output at that plant, but will incur a loss at the other plant. By accepting both projects the company, Diamond Chemicals, would achieve a 14% increase in output. However, based on forecasted demand by strategic analysts, the 14% increase does not make sense, but an increase of 7% does. Therefore both these projects seem to be mutually exclusive because each would attain the 7% increase.
The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is
b. Independent projects are ones that can both be accepted without either affecting the other. Mutually exclusive projects are ones that if one is accepted the other must be rejected.
The ARR (Accounting rate of return) is the only method that compare the measure of profit over the life of a project to the amount of capital that must be invested to earn that profit. Once the ARR has been calculated, it is compared to the firm’s target return normally the organisation’s
Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.
Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.
Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is
Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only
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).