Various techniques of capital budgeting

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.

ii. The project should be accepted if the NPV is positive because such a project increases shareholder value.

If the business was to make an investment on a project that was not right or not profitable the smart thing to do would be to not invest in the project or consider it at all. An investment that does not make any money can be wasteful for the business and make it lose a lot of money in the long run. That is why it is important for those who make the decision to evaluate all of their alternatives, risks, and returns, etc in order to decide on whether or not to reject or accept a project that it might have in mind.

WACC: is a discount rate with minimum acceptable rate that determine if any project would be optimistic for NPV or not. Capital budgeting is the process of assessing the profits for future business projects especially when the funds are limited (Unknown, 2014).

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

In previous calculation, it already know the percent Debt is 34.4%, percent Equity is 65.6%, Cost of equity capital is 11.088% and in this case gives Marginal effective corporate tax rate is 35%. So it only just to calculate cost of Debt. The cost debt is the interest rate or yield that a firm must pay on its bonds. In this case, it uses weighted average yield to maturity to calculate cost of debt. Through the form of EXHIBIT 11 and using two column debt amount and yield to maturity to finance cost of debt is 5.286%, however, the appropriate cost of debt is the after-tax

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

In the given case, there are five projects including Whalen Court, Gopher Place, Stadium Remodel, Goldie’s Square and The Barn. All of these projects were under consideration for the purpose of implementation. Each of the projects has its own cost and benefits on the performance of Target Corporation. The process of choosing one of the projects which has high Net Present Value and Internal Rate of Return is very important for the company as capital investment has a significant impact on the short term and long term profitability of the company. As a result, the ultimate objective of the case is to carry out an analysis which might help in ranking the projects so that the company would come up with the decision for acceptance and rejection of the

The project has a positive net present value of $46.59 million. As such, the project should be accepted. The reasoning behind this is that the company should accept any project if the NPV is above 0. The NPV reflects value added to the company. Management, therefore, should pursue any project that adds value to the company and that means pursuing projects with a positive NPV. A positive NPV will increase shareholder wealth, and a negative NPV will reduce shareholder wealth (Baker, 2000).

(a) If the required return is 10 percent, what is the profitability index for both projects? If the company applies the profitability index decision rule, which project should the firm accept?

Capital Budgeting is the planning process used to determine whether an organization's long term investments are worth the funding of cash through the firm's capitalization structure.

WPC has used a discount rate of 15% to evaluate potential projects for the last 10 years. Many in management are correct in thinking that this rate should be evaluated on a much more frequent basis. The current rate of 15% is much too high considering the yield on treasury bonds has declined from 10% to 5% over the last ten years. In order to calculate the correct discount rate we must first determine what their equity and debt ratios are. As you can see in Exhibit1, in order to find the total value of equity we must multiply the number of total outstanding shares of stock times the market value of each share. Completing this calculation shows us that WPC has $12 billion in outstanding equity. WPC also has $2.5 billion in outstanding debt. If you add the debt and equity together we see that WPC has a total of $14.2 billion in outstanding financing. Assuming the 10 year rate of Government Bonds of 4.60% as our risk free rate and using the Capital Asset Pricing Model we find that that WPC’s return on equity is 11.2% (See Exhibit 1). As stated in the case, Worldwide Paper Company has an A bond rating so we can use the 5.78% for their return on debt. Combining all of these variables in the Weighted Average Cost of

a. Capital budgeting is the process of analyzing projects and determining which ones to accept and include in the capital budget.

Capital budgeting is a means by which companies can evaluate the long-term economic impact of proposed investment projects. It comprises both a financial and investment component. The complex nature of capital budgeting offers measurability and accountability for making financial decisions regarding which investments are worthwhile in meeting an organization’s strategic plan. Financial simulations offer the opportunity to understand the complexity of capital budgeting.

NPV = PV inflows - Cost = Net gain in wealth. Accept project if NPV > 0. Choose between mutually exclusive projects on basis of higher NPV. Adds most value.