Risk Analysis on Investment Decisions

According to the researchers the increased value results from an opportunity to utilize a specialized resources which arises solely as a result of the merger (Jensens & Ruback, 1983; Bradle, Desai and Kim , 1983). For creating operational and financial synergies managers believe that two enterprises will be worth more if merged than if operates as two separate entities. Thus, the two companies, A and B:

This decision may be the result of a conservative policy pursued by a firm. Restriction may be imposed on divisional heads on the total amount that they can commit on new projects.Another internal restriction for capital budgeting decision may be imposed by a firm based on the need to generate a minimum rate of return. Under this criterion only projects capable of generating the management’s expectation on the rate of return will be cleared.

At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk. The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create returns greater than the industry cost of capital for each specific project.

Hypothetical Answer: It would be a huge loss if the new projects undertaken would not yield a good rate of return. The rate of return on invested capital is the most important thing and maximizing shareholder value is the most important thing. Would you help in this decision making process so I do not take on risky

The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold, ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.

Capital budgeting is a long-term schedule that decides what investment projects to choose. When an option is selected, a company decides where and how to obtain the funds to support its investment and a way of determining the capital structure. A company should make sure it has access to working capital to maintain it operations daily. If this is not available, the company will not be able to maintain it daily operation until

Capital budgeting is the decision process that managers use to identify those projects that add value to the firm’s value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is

When making capital budgeting decisions, there are various techniques that can be utilised. Ross et al. (2008) describes that the predominant capital budgeting methods used as being the Net Present value (NPV) method, the Internal Rate of Return (IRR) method, the Payback method, and the Accounting Rate of Return (ARR) method. Conversely, Brealey, Myers and Allen (2011) proposes that the NPV and IRR methods are considered prestige compared to the ARR and the Payback Methods, as they take into account the time value of money. Thus, the following project evaluation will focus on using the NPV and IRR methods.

This case study analyzed five different projects Target Corporation had to decide on capital spent for which project created the most value and the most growth for the company and its shareholders. By analyzing the financial statements and exhibits of each project, I was able to determine the positives and negatives of each of these alternatives. The alternatives were Gopher Place, Whalen Court, The Barn, Goldie’s Square, or Stadium Remodel.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

In fully investigating all of our calculations we are fully invested in using the Net Present Value figures we calculated as a means of ranking the eight projects. In doing so we found reasons in which why the Net Present Value was our benchmark for ranking the projects and why we did not use the Payback Method. The Payback Method ignores the time value of money, requires and arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development and new projects. When comparing the Average Accounting Return Method to the Net Present Value method we found that the Average Accounting Return Method is a worse option than using the Payback Method. The Average Accounting Return Method is not a true rate of return and the time value of money is ignored, it uses an arbitrary benchmark cutoff rate, and is based on accounting net income and book values, not cash flows and market values. Plain and simply put, the Net Present Value method is the best criterion to use when ranking these eight

There are several traditional methods that can be used in appraising investment decisions. For instance, the net present value method (NPV) which entails estimating the costs and revenues of a project and discounting these figures to get their present values. Projects with the biggest positive net present value are the ones chosen as they represent the best stream of benefits of investing in the project over and above recovering the cost of initiating the projects. The discount rate is another method which is similar to the net present value method but reflects more on the time preference. This approach may focus on the opportunity cost of

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.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I