Capital Budgeting (NPV) Year Cash Flows -5,969 1 1,516 2 1,656 3 1,738 4 2.094 Currently, the investor's required rate of return 4.7% Please compute the projects NPV (hint: it is positive). What if interest rates in the broad economy went up. and also the firm became riskier? Investors would require a higher rate of return. 1. Suppose the required rate increases 2%. How much would the NPV drop? A Between 200 and 270 B Between 270 and 280 C Between 280 and 290 D Between 290 and 300
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- Your firm is evaluating a capital budgeting project. The estimated cash flows appear below. The board of directors wants to know the expected impact on shareholder wealth. Knowing that the estimated impact on shareholder wealth equates to net present value (NPV), you use your handy calculator to compute the value. What is the project's NPV? Assume that the cash flows occur at the end of each year. The discount rate (i.e., required rate of return, hurdle rate) is 17.4%. (Round to nearest penny) Year 0 cash flow -132,000 Year 1 cash flow 52,000 Year 2 cash flow 31,000 Year 3 cash flow 42,000 Year 4 cash flow 39,000 Year 5 cash flow 18,000A capital budgeting project is expected to have the following cash flows: Year Cash Flows 0 -$500,000 1 $300,000 2 $300,000 3 $200,000 4 $100,000 What is the project's net present value at a 12% required rate of return? Group of answer choices $276,475 $225,868 $212,923 $200,373Capital budgeting problems and what king of you used for solving (NPV and IRR PROBLEMS ) A firm has the following investment alternative. Each one lasts a year Investment A B C Cach inflow $1,150 $560 $600 Cash outflow $1000 $500 $500 The firm's cost capital 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive. a. What is the net value of investment A? Investment B? investment C? B. W hat is the internal rate on investment A? investment B? INvestment C? c. Which invedstment(s) should the firm make? Why? d. If the firm had unlimited sources of funds, which investments should it make? Why? e. If there another alternative, investment D, with an internal rate of return of 6 percent, would that alter your anser to question (d)? why? f. If the firm's cost of…
- Capital budgeting problems and what king of you used for solving (NPV and IRR PROBLEMS ) A firm has the following investment alternative. Each one lasts a year Investment A B C Cach inflow $1,150 $560 $600 Cash outflow $1000 $500 $500 The firm's cost capital 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive. d. If the firm had unlimited sources of funds, which investments should it make? Why? e. If there another alternative, investment D, with an internal rate of return of 6 percent, would that alter your anser to question (d)? why? f. If the firm's cost of capital rose to 10 percent, what effect would that have on investment A's internal rate return?A firm wants to start a project. A team of financial analysts estimated the following cash flows year cash flow 0 -$100,000 1 55,000 2 43,000 3 45,000 Suppose that the discount rate (interest rate) is 12%. The profitability index (PI) is Group of answer choices 15,416.59 1.15 0.87 2.15. Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. 1. List and explain three (3) of these factors. 2. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? 3. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? 4. With practical example(s), differentiate between compounding and discounting. 5. As a Business Finance student, what is the essence of the valuation principle in your personal life?
- 1 Scenario AnalysisShao Industries is considering a proposed project for its capital budget. Thecompany estimates the project’s NPV is $12 million. This estimate assumesthat the economy and market conditions will be average over the next fewyears. The company’s CFO, however, forecasts there is only a 50% chancethat the economy will be average. Recognizing this uncertainty, she has alsoperformed the following scenario analysis: Economic Scenario Probability of Outcome NPVRecession 0.05 -$70 millionBelow average 0.20 -25 millionAverage 0.50 12 millionAbove average 0.20 20 millionBoom 0.05 30 millionWhat are the project’s expected NPV, standard deviation,…a. Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. List and explain three (3) of these factors. b. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? c. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? d. With practical example(s), differentiate between compounding and discounting. e. As a Business Finance student, what is the essence of the valuation principle in your personal life?Suppose that you are working as a capital budgeting analyst in a finance department of a firm and you are going to evaluate two mutually exclusive projects by implementing different capital budgeting techniques. The cash flows for these two projects are given below. YEAR CASH FLOW (A) CASH FLOW (B) 0 -$17,000 -$17,000 1 8,000 2,000 2 7,000 5,000 3 5,000 9,000 4 3,000 9,500 1) Suppose that the discount rate is 11%. Calculate the Net Present Values (NPV) of both projects. Which project should you accept according to NPV? Evaluate your findings.
- XYZ Corporation is considering a capital budgeting project and requires a detailed analysis. The company has provided youwith the following financial information and ratios:Return on Investment (ROI): 15%Payback Period: 3 yearsNet Present Value (NPV): R50,000Internal Rate of Return (IRR): 12%Cash Flows:Year 1: R20 000Year 2: R30 000Year 3: R40 0001.4 Calculate the ARR for XYZ Corporation. Assume depreciation is calculated on the straight-linemethod and that the project has a scrap value of R5000The Potential for Multiple IRRs A proposed investment has the following projected after-taxcash flows over its 3-year life:Initial outlay (time 0) = ($1,000)End of year 1 = $2,000End of year 2 = $2,000End of year 3 = ($3,700) Required 1. In a capital budgeting context, explain the difference between a normal and a non-normal cash flowpattern. What is the importance of this distinction for estimating the internal rate of return (IRR) of aproposed investment? 2. For the proposed investment project just described, how many IRRs will there be? Why?3. Use Excel to prepare a graph of the net present value (NPV) profile of the proposed investment describedherein. On the X-axis, show discount rates from 0% to 120%, in increments of 5%. On the Y-axis, showthe estimated NPV of the project for each of the specified discount rates. (Use the built-in NPV functionin Excel to estimate the NPVs.) Based on a visual examination of the graph, what are the two estimatedIRRs for the proposed investment? 4.…A project has the following cash inflows $34,444; $39,877; $25,000; and $52,800 for years 1 through 4, respectively. The initial cash outflow is $140,000. The firm has decided to assume that the appropriate cost of capital is 10% and the appropriate risk-free rate is 6%. what is the internal rate of return (IRR) of the Project? * 10