Reference no: EM131023115
The text book favors Internal rate of return and Net present value. Internal rate of return because this method does consider the time value of money and looks at the cash flows over the entire life of the project. It computes the rate that will discount the future cash flows to be equal to the cash outlay for the project. Capital investment appraisal techniques define IRR as discount rate that gives a value of zero to NPV or net present value. All capital investment appraisal techniques, IRR is generally considered to measure the efficiency of the capital investment. Thus, if cost of capital investment in company works out to be greater than the IRR value, the project is highly likely to be rejected. On the other hand, a low cost of capital has more chances of being accepted. IRR is calculated by equating NPV to zero and then deriving the discount rate. Even though IRR and NPV are related capital investment appraisal techniques they are different from each other.Net Present value because this method discounts the project's future cash flows by a predetermined rate, such as the targeted or needed rate. If the cash flows discounted by the targeted rate exceed the cash investment, the project is accepted. That is, the project provides the targeted return or more. All capital investment appraisals have a single objective – drive towards a positive NPV. The NPV is a mathematical calculation involving net cash flow at a particular present time 't' at discount rate at the same time, i.e. (t – initial capital outlay). Thus there is an inverse proportional relation between discount rate and NPV. A high discount rate would reduce the net present value of capital. A high interest rate increases discount rates over a period of time and most capital investment appraisals are wary of such an increase.
1) Which method is MOST preferred (and why)?
2) Not really a question, but more of a comment, think about each of your answers in your write-up above when answering question 2. This has to do with changing risk across projects. So, if I have 2 projects, and each deserves a different risk rating, how do I handle it (Don't answer here, save that for DQ2).
3) What if I have 2 projects. Will there be a case where NPV is better for the one and IRR better for the other? Can you think of why/when this might happen?
|
Yield to call-yield to maturity and market rates
: Absalom Motors's 8% coupon rate, semiannual payment, $1,000 par value bonds that mature in 10 years are callable 6 years from now at a price of $1,025. The bonds sell at a price of $1,254.87, and the yield curve is flat. Assuming that interest rates ..
|
|
Issued bonds-bond valuation with semiannual payments
: Renfro Rentals has issued bonds that have a 11% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 9%. What is the price of the bonds?
|
|
Fraudulently reported inflated earnings
: For several years, CSK Auto, Inc., fraudulently reported inflated earnings. During this period, Maynard Jenkins was a CEO. He was not involved in the fraud, however, and was never charged with a crime. Nonetheless, using a SOX provision, the SEC soug..
|
|
Salvage value for the manufacturing process is expected
: Minnesota Metal Forming Company has just invested $500,000 of fixed capital in a manufacturing process, which is estimated to generate an after-tax annual cash flow of $200,000 in each of the next 5 years. At the end of year 5, no further market for ..
|
|
Internal rate of return and net present value
: The text book favors Internal rate of return and Net present value. Internal rate of return because this method does consider the time value of money and looks at the cash flows over the entire life of the project. Which method is MOST preferred (and..
|
|
A franchise exists when the owner of a copyright licenses
: In raising capital, a sole proprietor is limited to his or her personal funds¾a personal loan is not possible.A. True, B. False
|
|
Decide how many pipe rolling machines to purchase
: Managers at Midnight Manufacturing must decide how many pipe rolling machines to purchase. Each machine can process 100 pipes per hour. One machine will result in a fixed cost of $2,100 per hour, while two machines will result in a fixed cost of $3,7..
|
|
Competitors in the discount drug chain store business
: Lenows Drug stores and Halls Pharmaceyticals are competitors in the discount drug chain store business. Complete the following given earnings before interest and taxes of 20,000,30,000 and 120,000. Assume the tax rate is 30%. Leave nothing blank but ..
|
|
Marie performs personal services for the corporation
: Marie performs personal services for the corporation with a fair market value of $193,200 in exchange for 400 shares of stock.
|