The rationale behind the NPV method is straightforward: if a project has NPV = $0, then the project generates exactly enough cash flows (1) to recover the cost of the investment and (2) to enable investors to earn their required rates of return (the opportunity cost of capital). If NPV = $0, then in a financial (but not an accounting) sense, the project breaks even. If the NPV is positive, then more than enough cash flow is generated, and conversely if NPV is negative.
Consider franchise L 's cash inflows, which total $150. They are sufficient (1) to return the $100 initial investment, (2) to provide investors with their 10 percent aggregate opportunity cost of capital, and (3) to still have $18.79 left over on a present value basis. This
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If the franchises are mutually exclusive, then franchise S should be chosen over L, because s adds more to the value of the firm.
a. Capital budgeting is the method used to determine whether a firm should invest in a project. To determine if a project should be invested in, firms use methods such as net present value and internal rate of return to analyze the projected cash flows. Firms should choose projects that increase its
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The main disadvantage of the discounted payback period is that it does not account for cash flows after the payback period. Most companies still use the payback period because it does give information in about risk and liquidity. But, it does not hold as much weight as the NPV and IRR do when deciding to pursue a project.
j. 1. Cash flows that start with an outflow then have inflows are normal cash flows. Nonnormal cash flows are cash flows that change between positive and negative cash flows more than once. Project P is an example of nonnormal cash flows.
2. Project P’s NPV is $386,777, the IRR is 25.00%, and its MIRR is 5.60%.
3. Project P has nonnormal cash flows. The project’s cash flows begin with a negative, then a positive, and ends with a negative cash flow. This project should not be accepted because its NPV is negative and its MIRR is less than the cost of capital.
k. 1. The NPV for Project S without replication is $4,132.23 and $6,190.49 for Project L. The calculated NPV does not include the cash flows of Project S when the project will be replicated. Based on these NPVs, Project L should be chosen over Project S.
2. The equivalent annual annuity for Project S is $2,380.95 and $1,952.92 for Project L. IF these projects are mutually exclusive, Project S should be accepted because its equivalent annual annuity is higher than the Project
Fixed costs of $100,000 plus the variable costs of $60,000 will give us $160,000 in total expenses. The gross ticket sales of $660,000 minus the total expenses of $160,000 give us a yearly net income of $500,000. The new lift has an economic life of 20 years and we would like to make 14% on our investment. The NPV factor of 14% at 20 years is 6.6231. By multiplying our net yearly income or our annuity of $500,000 times the NPV factor of 6.6231 we will have a NPV of $3,311,550.
According to the calculations, it will be impossible for the company to reach the sales goal of 12.5 million regardless of which option they choose. However the best outcome is with the option number two which is to develop an exclusive franchise agreement with existing non-exclusive dealers.
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.
...eting tool that show the differences between the present value of revenues and the present value of expenses. The project can be profitable when the net present value is positive. In other words, the present value of revenues is greater than the present value of expenses. Profitability index is another tool for evaluating investment projects, which is the ratio of the PV of benefits on the PV of costs. A project can be beneficial if the profitability index is greater than 1. Also, it has the same idea as NPV that In other words, the present value of benefits is greater than the present value of costs. However, these two methods (NPV and Profitability Index) have been used to evaluate the proposal of implementing EHR.
The two main issues in this case are the project analysis and financial forecasting. The project should be analyzed before doing the forecasting, because any recommendations on the project will affect financial forecasting for the next two years.
o Pay $200,000 up front for development fees and franchise fees for the first five stores
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
Making an investment towards a new project/product/company is hardly a simple process. Numerous factors including costs, benefits, time, and resources need to be taken into account before a decision to pursue a new project should be ventured into. At the end of the day prioritising projects and investing funds into projects that have the most potential towards favourable return on investment should be considered. Investment appraisal should not only be used for projects with a monetary return, it is also pertinent to use the tools where the return may not be easy to quantify such as training or development programs. Investment
Everybody enthusiastically suggested different project. It was very heard for all of us to select the particular project but then I came up with idea that everyone shall choose 2 project names and first will get 5 points and second one will get less points. Through this way we selected the project with majority of votes. I was glad we selected the Solar system project cause we already put the idea of solar roofs in previous mini project and now we could build up the entire housings plan. This project can cover more than 20 solar based houses and recreational clubs. The major feature of this project was that the houses are independent of conventional electricity as they have electricity generated by using solar roofs moreover they have a backup source which can be used to deliver solar energy to other cities in emergency. Recreational centers and shopping centers are other associated features of our project. Unlike previous project this major project does include capital expenditure request. The purpose of this Capital Expenditure Request (CER) is to request funding approval for the construction of the project. I started on working of work break down structure, gantt chart and budget
It is important to clarify some key assumptions that were made in valuing the properties to this NPV. First, the project yields a high IRR of 73 %, due largely in part to the sale of each building upon lease up. For the cash flow projections, it was assumed that all buildings are sold 18 months after construction completion. Therefore, with the exception of the last building to be sold, Heron Quay, the buildings are sold toward the end of their free-rent periods and no rent is collected.
In “Venture Capital” alternative, a sum of $3.5 million will be traded in exchange for 750,000 shares and 50% of the board seats, which will result in a weighted average outstanding shares of 1,375,000. Net income will come to $514,500 and EPS will be 0.29.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
ii. A company borrows £2,000,000 in 1998, with a fixed interest rate of 8%, payable annually for a 5 year period.
Heldman, K. (2011). PMP: Project management professional exam study guide, sixth edition. Indianapolis, Ind: John Wiley & Sons.
A franchise is simply investing money in a location or store, and then having the store become your own business after learning how to manage the entire business. You earn the majority of the profits, and you also don't have to worry about operations. You'll be taught by the company on how it run the entire business, and this is the reason why this is a huge and very easy way to become rich. Franchises require quite a hefty investment depending on the business you plan to buy. However, if the business is in high demand, there is profits to be made. Take for exMple the Cold Stone Creamery business. Countless people purchase one of their many franchises. The money is very good, the opportunities are endless, and the fact that there is no more need for advertising is what makes this more worth the investment in the long