Corporate Finance Ross Mini Case 8Ed

All of the cash flows are discounted back to the year of 2002 in the calculation of NPV value. With the annual cost savings of $80 from 2003 to 2007 and the integration cost of total $130, Timken’s new NPV is calculated to be -$970.42.

After evaluating the Super Project for General Foods, the two main things that management needed to address were the relevant incremental and non-incremental cash flows discussed below and incorporate the NPV and the net cash flows (yearly) to make a decision on whether to accept or reject the project. The start-up costs were determined by splitting up the costs of $160,000 in 1967 and $40,000 in 1968. To calculate the yearly cash flows, I used year 1 through 10, and the gross profit was calculated by subtracting out relative cash flows and the before tax depreciation. The NPV of $169,530 is positive for the 10% discount rate, which is less than the IRR of 11.4%.

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

Overhead expenses – not project specific, in this case not a direct result from taking on the Super project so the team did not include

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.

The third scenario was ignoring the option to invest in the second-generation project and selling the equipment in year 2. We evaluated this option as a put option. First, we calculated the probabilities for going up and down based on the assumption of a risk neutral word. As a result, the probability of going upward is calculated as 0.3375 and downward probability is 0.6625. In order to determine the present value of all the sequence cash flow at the end of year 2, we calculated the upside change rate and downside change rate as 64.87% and -39.35%, respectfully. The next step is to analyze the option value by using the “Binomial Tree” method. In order to determine the present value of all the subsequence cash flow at the end of year 2, we calculated the cash flow at each node on the tree, until 2006. We discounted all the cash flow at the risk free rate at 10%. The End of Year NPV of all the subsequence cash flow at Year 2 is calculated as $7,571,752, and the selling price of the equipment at end of 2 is $4,000,000, which is the salvage value. We found the NPV of selling the machine at end of Year 2 to be -$2,951,861 as of Year 0, which is negative. The APV of the project after adding the option turned out to be -$6,321,932. This negative APV suggest that the

The NPV compares the inflow of cash against the flow of cash to make the investment. With the cash flows occurring over a period of time, NPV also takes into account the cost of capital. The cost of capital or discount rate allows the company to weigh the present value of capital today with the investment capital’s present value. Futronics Inc. investment would have an NPV of $138,642.39. The NPV of this investment would add value to Futronics Inc.’ worth.

The sum of the NPVs of future cash flows (cost savings) with tax savings from depreciation considered:

Furthermore, a sensitivity analysis of factors such as the cost of raw materials, selling price per unit and capacity utilization demonstrates that a small change in any one of these variables could have a major impact on the project’s bottom line. In Appendix B, I examine a scenario in which the selling price per unit decreases by 1% and the cost of raw materials per unit increases by 1% at the outset of the project. In this scenario, the resulting NPV changes from a positive $5.4 million to a loss of $666,000, and the IRR falls below the discount rate to 9.15%. This, to me, reveals that the potential upside of this project is not large enough to account for discrepancies due to imprecise projections, flawed assumptions, or unforeseen risks.

According to Zimmerman (2014), sunk costs are expenditures incurred in the past which cannot be recovered. Since sunk costs are not recoverable, they are irrelevant in the decision-making process. However, consideration should be taken into account in creating strategies on future cost in business or investment endeavors.

2. Compares the returns of the asset to the market over a period of time (Beta)

For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm.

with the data about the affectability of the task to a specific change in any of the variables of projection.For sample, how much the NPV expands or diminishes because of an adjustment in the offering cost of the undertaking or cost of assembling or altered cost or rate of devaluation or whatever other element connected with venture. We are to process NPV at buy costs furthermore NPV at after change costs. Net contrast is produced as affectability results. Generally just PV of changes can be ascertained. The rule took after is that the venture ought to be acknowledged if the aggregate advantage from the undertaking is more prominent than its aggregate expenses. As such if NPV is certain, the undertaking ought to be acknowledged generally to be

The machine will have a depreciation of $140,000 for the first five years; this is determined by dividing the initial investment by five. The old machine will be sold in 2010 for $25,000 which is below the current book value of $36,000. This is why there is a capital gain of $3,850 that will add to the incremental savings plus the depreciation for that year. The new sheeter will be sold at the end of the last year for $120,000 which will be taxed at 35; this is why a cost of $42,000 appears for the last cash flow (Exhibit 1). The NPV is a positive $1,063,567 and the IRR is 36%, this shows that the project will add value to the company along with having a great return. The payback period for the project is 2.45…Using the growth rate of 3%, the sales are projected to be nearly doubled from 2009 with the new sheeter. However, Pitts believes that he would not be surprised to see them increase by 7% or