Principles of Finance Assignment

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Andrew Wolford BYS330 Principles of Finance Week Four Assignment March 4th, 2014 Chapter Ten Study Problem 10-4: (Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $80,000.00 and expected free cash flows of $20,000.00 at the end of each year for 6 years. The required rate of return for this project is 10 percent. a. What is the project’s payback period? Remember first that payback period is the number of years needed to recover the initial cash outlay related to an investment as is determined by the number of years just prior to complete payback + the unplaid-back amount at beginning of yearfree cash flow in year payback is completed. Here, simply enough, you just have to…show more content…
Chapter Eleven Review Question 11-1: Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions? Why are we interested only in incremental cash flows rather than total cash flows? First, a company receives and is able to reinvest free cash flows. Accounting profits, by contrast, are shown when they are earned as opposed to when the money is actually in hand. Generally speaking, a company’s accounting profits and free cash flows are not timed to occur simultaneously. As an example, capital expenses such as vehicles, plant, and equipment are depreciated over several years with their annual depreciation subtracted from profits. Free cash flows, however, will accurately reflect the timing of benefits and costs. This in turn shows when money is received, when it can be reinvested, and when it must be paid out. When measuring cash flows, only incremental after-tax flows matter. It is important to understand what new cash free cash flows the company will receive if it decides to go ahead with a particular project. In deciding which free cash flow is actually incremental, a company has to assess itself with versus without a particular new project. A company must take care to be wary of cash flows which are diverted from existing products. Merely moving sales from one product line to a new product line does not bring anything new into the company. Also, the firm should watch for incidental or

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