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Pages 3

2,00,000 26,000 30,000 50 40,000.00 30,000 Year 0 -2,00,000 Year 1 0 16000

Coporate tax rate Return on Investment Capital tax gain

40% 12% 20%

Year 2 0 16000

Year 3 0 16000

Year 4 0 16000

Year 5 0 16000 -10000 50,000 520000 576000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 6,33,000 359181.1997

-520000 -7,20,000

16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000

16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000

16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 51959.95809

16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 46392.81972

-7,20,000 -7,20,000 -1,39,092

73,000

65178.57143 58195.15306

Internal Rate of Return NPV @ 5% NPV Year 0 -7,20,000 34,826 Taking IRR at 5% and 12% IRR Traditional Formula = LR + { NPV @ LR/NPV @ LR - NPV @ HR} X (HR-LR) IRR 0.064017186 6.401718635 Year 1 Year 2 69523.80952 66213.15193 Year 3 63060.14469 Year 4 60057.28066 Year 5 495972.0634

Therefore Internal Rate of Return for this Project is 6.69600

A)

Payback Period Year 0 1 2 3 4 5 Future Cash Flows -7,20,000 73,000 73,000 73,000 73,000 6,33,000 PV of FCF Accumulated NPV on FCF

65178.57143 58195.15306 51959.95809 46392.81972 359181.1997

-6,54,821 -5,96,626 -5,44,666 -4,98,273 -1,39,092

Pay back Period Cannot be…...

...Adjusted present value Wadia Haddaji February 20, 2008 • Topics: 1. Adjusted present value. • Readings: 1. Brealey, Myers and Allen, section 20.4. 1 The Adjusted-Present-Value Rule • Recall that we can write the value of a levered ﬁrm as the value of an otherwise identical all-equity ﬁrm and the value of its ﬁnancing decisions: V = VU +NPV(ﬁnancing decisions). • It is then obvious to deﬁne the APV of a project as the sum of its NPV to an all-equity ﬁrm and the PV of the associated ﬁnancing decisions: APV = NPV(unlevered project) + NPV(ﬁnancing decisions) • Separating the APV of a project into its NPV to an all-equity ﬁrm and the value of the associated ﬁnancing decisions should be generally useful for the ﬁnancial manager. 2 A Comparison of WACC and APV • Features/advantages of WACC. 1. WACC accounts for tax shield beneﬁt of interest in discount rate. 2. WACC is widely adopted by practitioners and is easy to use. 3. WACC is applicable when D/E remains essentially constant through project life. 4. WACC is most appropriate when the project is “typical” of the ﬁrms traditional businesses (i.e., same risk), or “scale enhancing”. • Features/advantages of APV. 1. APV accounts for tax shield beneﬁt of interest in cash ﬂows (not discount rate). 2. APV was introduced by academics and is slowly being adopted in practice. 3. 11% of ﬁrms always or almost always use it. • APV often requires/accomodates knowledge of a particular debt repayment schedule. • APV (as opposed...

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...Comparing Net Present Value and Internal Rate of Return by Harold Bierman, Jr Executive Summary • • • Net present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to use the IRR method correctly. Accept or Reject Decisions Frequently, the investment......

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...inspecting the cash flows, NPV method, IRR method, Payback period method and PI method are three most popularly used quantitative methods to do capital-budgeting analysis. Among the three methods, NPV is better than the other two methods in most situations. 1. Definition 2. Calculation results under different methods Using the mentioned 4 methods and Excel, the following calculating result can be achieved. Project | 1 | 2 | 3 | 4 | 5 | NPV | 73.09 | -85.45 | 793.92 | 228.22 | 129.70 | IRR | 10.87% | 6.31% | 11.33% | 0.1233 | 11.12% | Payback Period | 7 | 2 | 15 | 6 | 8 | Discounted Payback Period | 8 | 3 | 15 | 10 | 14 | PI | 1.04 | 0.97 | 1.20 | 1.11 | 1.06 | Project | 6 | 7 | 8 | Incremental index for 7-8 | NPV | 0.00 | 165.04 | 182.98 | -17.94 | IRR | 10.00% | 15.26% | 11.41% | 10.18% | Payback Period | 1 | 2 | 7 | - | Discounted Payback Period | 1 | 3 | 7 | - | PI | 1.00 | 1.08 | 1.09 | -0.01 | Consider that Project 7 and 8 are mutually exclusive, by calculating the incremental NPV, IRR and PI index, and we can find that project 8 should be chosen over project 7 in all the 3 methods. Thus, the ranking results under different methods can be achieved: NPV | 3 | 4 | 8 | 5 | IRR | 4 | 8 | 3 | 5 | Payback Period | 6 | 2 | 7 | 1 | Discounted Payback Period | 6 | 2 | 7 | 1 | PI | 3 | 4 | 8 | 5 | In payback and discounted payback period methods, project 2 and project 7 actually have the same ranking. NPV and PI methods have......

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...value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true. Introduction To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as well as its strengths and weaknesses. From there, introduce the payback period method and then internal rate of return approach, as well as to consider their strengths and weaknesses. After outlining and explaining the three different approaches, it will finish up with comparing the different three and in a conclusion. NPV Net present value or NPV is an approach used to determine the value of an investment today (present) compared to the value of the investment in the future after taking the inflation and return into account. In simpler words, it compares the value of 1 pound today with the same pound in the future. Net present value is used in capital budgeting to analyze the profitability of an investment. It is usually calculated using tables and spreadsheets such as Microsoft Excel, but the main formula used to calculate net present value looks like this: Where C0 = Cash outflow at time t=0 Ct = Cash inflow at time t r = The discount rate As Ross (2013) states in his book, a project should be accepted if the NPV......

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...When cash inflows are even: |NPV = R × |1 − (1 + i)-n |− Initial Investment | | |i | | In the above formula, R is the net cash inflow expected to be received each period; i is the required rate of return per period; n are the number of periods during which the project is expected to operate and generate cash inflows. When cash inflows are uneven: NPV = | |R1 |+ |R2 |+ |R3 |+ ... | |− Initial Investment | | | |(1 + i)1 | |(1 + i)2 | |(1 + i)3 | | | | |Where, i is the target rate of return per period; R1 is the net cash inflow during the first period; R2 is the net cash inflow during the second period; R3 is the net cash inflow during the third period, and so on ... Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms, [pic] where [pic] – the time of the cash flow [pic] – the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital [pic] – the net cash flow i.e. cash inflow – cash outflow, at time t . For educational purposes, [pic] is commonly placed to the left of the sum to emphasize its role as (minus) the investment. The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash......

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...free encyclopedia Jump to: navigation, search In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, above the cost of funds. NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) — is called the yield and is more widely used in bond......

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...Present Value: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. NPV is calculated using the following formula: NPV= -C0 + C11+r+ C21+r2+…+ Ct(1+r)t - C0 = initial investment C = cash flow r = discount rate t = time If the NPV of a prospective project is positive, the project should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Example of Net Present Value To provide an example of Net Present Value, consider a company who is determining whether they should invest in a new project. The company will expect to invest $500,000 for the development of their new product. The company estimates that the first year cash flow will be $200,000 the second year cash flow will be $300,000, and the third year cash flow to be $200,000. The expected return of 10% is used as the discount rate. The following table provides each year's cash flow and the present value of each cash flow. Year | Cash Flow | Present Value = FV(1+r)t | 0 | - 500,000.00 | -500000/(1.10)^0 = -500000.00 | 1 | 200,000.00 | 200000/(1.10)^1 = 181,818.18 | 2 | 300,000.00 | 300000/(1.10)^2 = 247,933.88 | 3 | 200,000.00 | 200000/(1.10)^3 = 150,262.96 | NPV = -500000.00 +......

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...* Payback Method * Capital Allowance – required to do the assignment * Broad idea of assignment Part A : understanding the method Part B : theoretical method NO TAX requirement ! Valuation method .. NPV, IRR , Payback method. NPV – A rule that company use whether accept or reject the project. Based on discount factor , interest rate. Study guide! – NPV (number of calculation, examples) IRR – a discount rate that gives a zero NPV… cash flow tend to zero. NPV you know initial initial investment , cash flow, discount rate IRR you know initial initial investment , cash flow, but predict your discount rate You cant rely excel ! (don’t use the functioin) Pay back method : how long it takes your initial investment … ? 2 years etc Pay back period --- every company can decide their payback period. Whether they accept and reject the project. Two companies in the same sector.. they may have two payback period. Evaluation method.. accounting measure. NPV rule : accept investment project which cash flow worth more than the cost of financing the projects. IRR rule : accept the project if IRR Is greater than the cost of capital. If your IRR higher than discount rate , accept the project. Pay back : payback period is less than specified payback period. | If se NPV .. you should accept the project..and IRR rule.. but payback period not really.. it depends to the company Depreciation vs capital allowance. (not related to assignment) Depreciation: using the asset,......

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...cost of capital is 10%. The expected cash flow are as follows: Year | Machine A(Rs. Lakh) | Machine B(Rs. Lakh) | 1 | 5 | 10 | 2 | 10 | 15 | 3 | 20 | 16 | 4 | 15 | 20 | 5 | 15 | 15 | Cost of Machine A: 25 lakh Cost of Machine B: 30Lakh Hearing the problem I remembered that this type of problem I had studied in capital budgeting, and I asked him to relax and meet me tomorrow @ 6:00pm. SOLUTION: 1. NPV METHOD: Year | Cash Flow( Rs. In Lakh) | PVF @ 10% | Total Present Value(Rs. In Lakh) | | Machine A | Machine B | | Machine A | Machine B | 1 | 5 | 10 | .91 | 4.55 | 9.1 | 2 | 10 | 15 | .83 | 8.3 | 12.45 | 3 | 20 | 16 | .75 | 15 | 12.0 | 4 | 15 | 20 | .68 | 10.2 | 13.6 | 5 | 15 | 15 | .62 | 9.3 | 9.3 | | TOTAL PV | 47.35 | 56.45 | | Less cash outflow | 25 | 30 | | NPV(NET PRESENT VALUE) | 22.35 | 26.45 | 2. PROFITABILITY INDEX : Present value of cash Inflow ÷ Present value of cash out flow Machine A: 47.35÷ 25 = 1.894 Machine B: 56.45 ÷ 30 = 1.881 Recommendation: | Machine A | Machine B | Choice | NPV | 22.35 | 26.45 | B | Profitability index | 1.894 | 1.881 | A | Finally I suggested him to go with MACHINE B. But he said that the profitability of A is more than B, at that time I recalled the example my teacher told me that at the end what do you want more cash in your drawer or profitability. And finally he got convinced and happy to get the solution, and gave me a nice party....

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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... cost of goods increased as a percentage of sales in the years under review. However, all the other figures decreased as a percentage of sales between 2014 and 2015 indicating that the figure for sales increased in 2015. ANSWER 3 -29 PART TWO Balance sheet Gross plant and equipment recorded the highest fraction of total assets in the two years under review. This is an indication that this incorporation prioritized investments in plant and equipment for financial stability purposes. Preferred stock recorded the lowest fraction of fixed assets in both 2014 and 2015 indicating that Lake of Egypt Marina Inc. kept the preferred stocks at a low level in order to minimize the preferred claims attributed to this class of stock. | Calculating Ratios | | | | | | | | | | | | | | | | | | | | | | | | ANSWER 3 - 29 PART ONE | | | | | Income Statements | | | Percentages | of sales | | 2015(in millions dollars) | 2014(in millions dollars) | 2015 | 2014 | sales | 515 | 432 | N/A | N/A | cost of goods sold | 230 | 175 | 44.66% | 40.51% | gross profit | 285 | 257 | 55.34% | 59.49% | other operating expenses | 20 | 25 | 3.88% | 5.79% | depreciation | 22 | 20 | 4.27% | 4.63% | interest taxes | 33 | 30 | 6.41% | 6.94% | preferred stock dividends | 5 | 5 | 0.97% | 1.16% | common stock dividends | 65 | 65 | 12.62% | 15.05% | | | | | | ANSWER 3 - 29 PART TWO | | | | | Balance sheets | | | | | | | |......

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...QP8-25 Calculating Project NPV Click Link Below To Buy: http://hwcampus.com/shop/qp8-25-calculating-project-npv/ You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $855,000 on an aftertax basis. At the end of the project, the land could be sold for $980,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 2,700, 4,200, 2,800, 2,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $800 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $350,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.9 million, and will be depreciated......

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...Less Initial Investment 125.000 NPV 23.298 NPV @ 12% = £23, 298 Project B: £000 Year NCF 1 43 2 43 3 43 4 43 5 43 Discount Factor 12% PV 0.893 38.399 0.797 34.271 0.712 30.616 0.636 27.348 0.567 24.381 Total PV 155.015 Less Initial Investment 125.000 NPV 30.015 NPV @ 12% = £30,015 Yes, they should be accepted because both projects have a positive NPV, therefore it indicates the increase in the market value of the shareholder’s funds. For both projects the company will recover the initial outlay and earn a return greater than 12% per year on the investment. 4 Question E According to Colin Drury, the most straightforward way of determining whether a project yields a return in excess of the alternative equal risk investment in traded securities is to calculate the net present value (NPV). This is the present value of the net cash inflows less the project’s initial investment outlay. If the rate of return from the project is greater than the return from an equivalent risk investment in securities traded in the financial market, the NPV will be positive. Alternatively, if the rate of return is lower, the NPV will be negative. A positive NPV therefore indicates that an investment should be accepted, while a negative value indicates that it should be rejected. A zero NPV calculation indicates that the firm should be indifferent to whether the project is accepted or rejected. Question F 1) If the cost of capital increases, the NPV would be reduced and......

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...1.NPV NPV(Net Present Value), is the present value of a project's cash flow minus the present value of its cost, it means that how much the project could create to shareholders' wealth, the more the NPV, the more value the project makes and the higher the stock's price. If NPV equal to zero means the cash flow which the project makes can compensate for the cost of investment, the rate of return equal to required rate of return. If NPV exceeds zero, the part of exceeded belongs to shareholders. Accept the project which has a positive NPV will create positive economic value added and market value added. In this case, it can be seen clearly from Table 1, SSW and CCS both has a positive NPV, they all create value and wealth for the company. What should be mentioned is that, the NPV of SSW is higher than CCS, it means SSW could add more value than CCS. Table 1. the NPVs of SSW and CCS SSW CCS NPV 240,796.39 226,897.07 2.IRR IRR(Internal Rate of Return ) is the discount rate that make the inflows to equal the initial cost, in other word, it makes NPV to equal to zero. IRR is an estimate of expected project's rate of return. If this return exceed the cost of the capital used to the project, the part of difference is a dividend to shareholders and causes the stock's price to rise. If the IRR is less than cost of capital , shareholders have to make up. In this case, the cost of capital of these two restaurants both equal to 10%, the Table 2 shows that the IRR of SSW is......

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