Lockheed Case

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.

IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more

30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)

An investment project should be accepted only if the NPV is equal to the initial cash flow.

2. The current NPV is negative. One way to save money would be to reduce consulting costs. Please set the average consulting cost per month in cell b33 to $5000. At what discount rate is the NPV for the project 0?_____0.026____

(TCO F) Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

The dollar value of the NPV in light of the expenditure is irrelevant. The project adds to shareholder wealth, and should therefore be accepted. The only time when the dollar values of the expenditure and the NPV matter is when the company must choose between two mutually exclusive alternatives (FAO, n.d.). In that case, the obligation that management has is to undertake the project that delivers the greatest increase in shareholder wealth.

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

4. Based on the information provided in the case, our group calculated the NPV for the project under both tax environment and tax-free condition, respectively, by using the excel spreadsheet and the NPV function. (For a detailed calculation of NPV, please refer to Appendix Under 15-yr.) According to our calculation, we have the following results: In the first case scenario, which the firm is in a tax environment (35% income tax), the NPV of the project equals to -$6,366,054.53

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

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

When deciding whether to invest in a project an investor first will compare investment or sunk costs to the expected profit and based on this decision will decide what to do. Depending on the specifics of the project calculating of sunk cost and expected profit might be rather different and will play the main role in the decision to invest, wait and invest later or not to invest at all. More detailed consideration of the standard NPV rule: to invest if present value of cash flow is greater than sunk cost will show that some projects cannot be simply estimated using this idea. For the irreversible projects such as building a factory or buying an option NPV method may not be proper

The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals.

IRR is one of the techniques (Lock, 2004). IRR is the rate at which the present value of the future cash flow will be equal to the initial cash flow and the NPV of the project will be zero. A project will be accepted if the cost of capital is lower than the IRR. Otherwise the project will be rejected. IRR provides many benefits. It helps to compare the cost of capital with the rate of return that will be earned on the project. It discounts the future cash flow and give correct decision in most of the cases (Daft, 1997).