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Assignment on capital budgeting
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High Mountain Technologies (HMT) is an expanded research and manufacturing company that produces a wide range of innovative products based on patented technologies. Its corporate headquarters and research and design facility were located in Toronto. According to the situation illustrated in the case, there were two investment opportunities available to High Mountain technologies. With respect to its investment budget at $3 million, related to manufacture of GPS transmitters used by the parents to keep track of their children or Surveillance Aircraft, used by the military to provide valuable battlefield intelligence. So, at first, one of problems in this case is based on fact that HMT hired the certified management accountant who did not have any experience in areas of capital budgeting or cost of capital; hence company would maybe have problems because he has very serious task. Another problem is to make a final decision in which of two projects to invest money: In GPS transmitter that fit into the shoes of children or small surveillance aircraft with ability to remain in the air for 48 hours). Besides that, Rogers has been given the assignment of completing a capital budgeting analysis of these projects. …show more content…
Therefore, with respect to the first opportunity relating to GPS transmitters, the cost of capital was estimated at 12.64%. Whereas, the weighted average cost of capital for the industry was estimated at 9.614% in which, 3% extra was added, as an extra provision for risk. On the other hand, for the second investment project relating to surveillance Aircraft. In which, the cost of capital was estimated at 8.548%, calculated by considering the industrial average of Beta, and then estimating its cost of
In SIVMED’s case, based on the definition of WACC, all capital bases should be included in its WACC. These include its common stock, preferred stock, bonds and long-term borrowings. In addition to being able to compute for the costs of capital, the WACC also determines how much interest SIVMED has to pay for all its activities. The value of the firm’s stock, which we want to maximize, depends of the after-tax cash flow. Hence, after-tax values for WACC are also needed. Furthermore, cost of capital is used to determine the cost of each debt, stock or common equity. Being able to analyze these will be essential into deciding what and how new capital should be acquired. Hence, the present marginal costs are ideally more essential than historical costs.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Andrews is a sensor manufacturer in the market. While the company has been unable to develop a straightforward competitive advantage over the course of the past three years, the competitive landscape of the market has become a significant source of concern for the company’s leadership. There are other companies out there who produce better products, or are able to compete strictly based on price cuts. It came to the CEO’s attention that there is an opportunity for Andrews to shift a large portion of its production to an offshore location. This decision will not only allow Andrews to reduce its labour and material costs, but will also allow for improved distribution practices.
First of all an analysis of the packaging machine investment’s hurdle rate is required. I will use comparable firm parameters approach to figure out the hurdle rate (WACC) of the firm using the information provided in Exhibit 5. The cost of debt should be calculated using the bond information given in footnote 2 of case under Exhibit 2. The cost of equity should be calculated using the Capital Asset Pricing Model.
2. Given the forecasts provided in the case, estimate the expected incremental free cash flows associated with Du Pont’s growth strategy and maintain strategy for the TiO2 market. How much risk and uncertainty surround these future cash flows? Which strategy looks most attractive (i.e., using the DCF (e.g., NPV) method)??
When considering the positives and the negatives, we would like to conclude that the gains outweigh the ethical concerns and that this technology will probably be an important part of if not all, but some of our lives. We would like to advise NTV to invest in this product. This investment should cover companies that are performing rigorous research and development which they plan on patenting, as these patent portfolios will become very important in the future. They should also invest in companies that are building basic functionality apps for WAR devices, and companies that are developing necessary hardware for WAR devices as these companies will probably be bought in the future by larger corporations like Google or Samsung.
The final model used to compute the cost of capital was the earning capitalization model. The problem with this model is that it does not take into consideration the growth of the company. Therefore we chose to reject this calculation. The earnings capitalization model calculations were found this way:
The purpose of this paper is to investigate capital budgeting decision under Galaxy Science Centre (GSC), which is non-profit organization. The need for such an analysis emerges from the case that only provides general information concerning the impact of capital budgeting decisions in the presence of strategic interactions among GSC. We are facing significant problems in different conditions, then through all given figures to make the best recommendations fro GSC.
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
It is stated that Verizon Communications Inc is a holding company that is one of the world’s leading provider of communications, information and entertainment products and services to consumer, businesses and governmental agencies with a presence around the world. They have wireless services (utilizing the largest 4G LTE technology) and wireline services (utilizing local and long distance voice services, data, broadband video, networking solutions, data center and cloud technology. In the report is recorded the investments within the business which they control, investments that they do not control but have the right to exercise the significant influence over are accounted for using the equity method. For investments with no control, they
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.
The returns on assets (ROA) ratios for ADCT are 9.20%, 11.40%, 11.60%, 11.30% and 5.20 for the years 1995-1999. There were no ROA industry averages in the "Almanac of Business and Financial Ratios," written by Leo Troy. ADCT's ROA ratios remain constant (around11%) from 1995 -1998. In 1999, ROA dropped 54% to 5.20. This decline indicates that ADCT may not be utilizing its assets properly. One explanation for the 1999 decrease is ADCT's acquisitions. For example, ADCT purchased Broadband Access Systems for 2.25 billion exchange of stock (Datek, 2000). Recent acquisitions require additional long-term debt and are reflected in the ROA reduction...
Companies should also consider capitalising cost when they add to the value of an existing resource. If the company upgrades part of the tools, property or equipment it uses, in a manner
...apital is the cost of fund used for financing a business. Ultimately, cost of capital refers to the method of financing used, whereby the cost of equity is financed exclusively by equity and cost of debt is financed exclusively by debt. Many company used this tool to finance their business, their overall cost of capital is derived from weighted average cost of capital (WACC). Company uses WACC in deciding which financial track to be followed. For example, if a person has $20,000 to capitalise and must select among Stock A and Stock B, the cost of capital is the dissimilarity in their returns. If that person invests $20,000 in Stock A and receives a 7% return, while Stock B makes a 9% return, the cost of capital is 2%. One and only way of theorizing the cost of capital is as the quantity of cash one could have completed by creating a dissimilar investment decision.