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FNCE20001 Lecture Notes - Lecture 15: Fisher Equation, Nominal Interest Rate, Discount Window

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orchidgnu53
27 Jul 2018
School
University of Melbourne
Department
Finance
Course
FNCE20001
Professor
josh

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Document Summary

Estimating the cash flows (numerator) for npv only include incremental cashflows. Exact timing of a project cashflows can affect the valuation of a project. Simplifying assumption used is that net cash flows are received at the end of a period. Cash outflows relating to how the project is to be financed are not included in analysis. Value of a project is independent of how it will be financed (e. g. ) equity/debt. Discount rate represents rate of return required by security holders. Financing costs aren"t included in cashflows because they would be double counted. Only cash flows that change if the project is accepted are relevant in evaluating. Cashflows from accepting project are compared with cashflows from rejecting. Take cannibalisation into account lost sales in existing products. Not included as they"ve been incurred in the past and won"t be affected by the project"s acceptance or rejection non-refundable. Overhead costs allocated by management to a firm"s divisions.

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Related Questions

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected net cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk adjusted WACC is 10%.

a. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $____
IRR ___%

b. How should the environmental effects be dealt with when this project is evaluated?

The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated allcosts in the "no mitigation" analysis from not doing the environmental mitigation.

The environmental effects should be ignored since the mine is legal without mitigation.

The environmental effects should be treated as a sunk cost and therefore ignored.

The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

c. Should this project be undertaken?

If so, should the firm do the mitigation?

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.

Problem 11-8
Capital budgeting criteria: ethical considerations

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10.33 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $63 million, and the expected net cash inflows would be $21 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $22 million. The risk adjusted WACC is 15%.

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %

How should the environmental effects be dealt with when this project is evaluated?

The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation" analysis from not doing the environmental mitigation.

The environmental effects should be ignored since the mine is legal without mitigation.

The environmental effects should be treated as a sunk cost and therefore ignored.


-Select-IIIIIIIVVItem 5

Should this project be undertaken?
-Select-The project should not be undertaken under the "mitigation" assumption.Even when mitigation is considered the project has a positive NPV, so it should be undertaken.Even when mitigation is considered the project has a positive IRR, so it should be undertaken.The project should not be undertaken under the "no mitigation" assumption.The project should be undertaken only under the "no mitigation" assumption.Item 6

If so, should the firm do the mitigation?

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.


-Select-IIIIIIIVV

ANSWER FULLY

Capital budgeting criteria: ethical considerations A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $51 million, and the expected net cash inflows would be $17 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $18 million. The risk-adjusted WACC is 10%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % How should the environmental effects be dealt with when this project is evaluated? The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation" analysis from not doing the environmental mitigation. The environmental effects should be ignored since the mine is legal without mitigation. The environmental effects should be treated as a sunk cost and therefore ignored. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. Should this project be undertaken? If so, should the firm do the mitigation? Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.