ACCT-311 Lecture Notes - Lecture 6: Cash Flow, Net Present Value, Marginal Cost
25 Mar 2016
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Document Summary
Projects are normally analyzed under the assumpion that the irm will. Economic life versus physical life operate the asset ill its end. If terminated prior to year 3, the machinery will have posiive salvage value. The project is acceptable only if operated for 2 years. A project"s engineering life does not always equal its economic life. Finance theory says to accept all posiive npv projects. Two problems can occur when there is not enough internally generated cash to fund all posiive npv projects: Externally raised capital can have large lotaion costs, which increase the. Increasing marginal cost of capital cost of capital. Investors oten perceive large capital budgets as being risky, which drives up the cost of capital. If external funds will be raised, then the npv of all projects should be esimated using this higher marginal cost of capital. Capital raioning occurs when a company chooses not to fund all posiive.
