Group Name_________________ Group No. ________
Answer Sheet for Merage Capital Budgeting Case:
Q. 1: Free Cash Flow: (1 Point)
Free cash flow is determined by adding up all the company’s incoming cash and then subtract the cash that the company is obliged to payout, which includes all expenses, debt service, preferred dividend and capital expenditures related to the fiscal period.
The result tells us how much cash was left over or how short of cash the company was at the end of the fiscal period.
Q. 2: Land: (1 Point)
Nothing, as it is mentioned that the value of the land will not be significantly different after 5 years so there is no opportunity cost. The center can sale the land after 5 years. The cost has already
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Q. 7: Payback: (1 Point)
Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.
|Payback Period = |Initial Investment |
| |Avg. Cash Inflow per Period |
Q. 8: NPV (1.5 Points)
The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.
Positive NPV (i.e. Discounted Inflow > Discounted outflow) = accept the project
Negative NPV (i.e. Discounted Inflow < Discounted outflow) = Do not accept the project
Zero NPV (i.e. Discounted Inflow = Discounted outflow) = Indifferent
Q. 9: IRR: (1.5 Points)
The internal rate of return refers to the rate which equates the present value of cash inflows and present value of cash outflows. In other words it is the rate at which net present value of the investment is zero. If the net present value is positive, a higher discount rate may be used to bring it down to equalize the discount cash inflows and vice versa. That’s why internal rate is defined as the breakeven financing rate for the project.
Q. 10: Sensitivity
The payback period looks at a project only until the costs have been recovered. This analysis tool is often ignored because it does not take into consideration the time value of money. The time value of money limitation of the payback period can be modified by using the discounted cash flows of a project for the analysis of when the outflows will be recovered.
The three aspects of cash flows the affect the value of any investment are the amount of expected cash flows, the timing of the cash flow stream, and the risk of the cash flows.
Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.
The difference between the present value of an investment?s future cash flows and its initial cost is the:
known as free cash flow (FCF), is useful in gauging a company’s cash flow beyond that necessary to
Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
The free cash flow method is used to gauge “a company’s cash flow beyond that necessary to grow at the current rate… [to ensure companies] make capital expenditures to continue to exist and to grow” (Drake, n.d.). Calculation of free cash flows utilizes various components, including a firm’s value, cash flow forecasts, a firm’s capital structure, the cost of capital, and/or discounted cash flows.
The PAYBACK technique is based on cash flows and it measures the time which is required for a proposal’s initial cash outflow to equal its cash inflow generated by the investment, the solution is expressed in years and month or days.
30. Free cash flow is cash flow that is available for distribution to all of the company’s investors (stockholders and creditors) after paying current expenses (other than interest) and taxes, maintain adequate working capital, and making the investments necessary for growth.
The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is
The purpose of this memo is to explain and recommend which projects Amstelveen Corporation should invest in based on capital budgeting calculations. First, I will explain if there are any contradictory recommendations and then I will give the recommended total I suggest Amstelveen to raise. I will also give my recommendation on which project(s) the company should pursue if it remains limited to €8,000.000.
Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is
Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.