Management and Organizational Studies 1023A/B Chapter 2: Cash Inflows and Outflows and Discount Rates

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 1023A/B
• Professor: Barry Hawn

Document Summary

Incremental operating costs: repairs and maintenance of new equipment, additional investment in inventory. Incremental revenues: reduction of operating costs, salvage value. The cost of capital is the average rate of return the company must pay to its long-term creditors and stockholders for the use of their funds. Future annual cash inflows ( 1+ discount rate)number of periods of discounting. Net present value of the proposed project is zero (-3170 + 909 + 827. + 751 + 683) at the 10% discount rate, so carver tech should invest in this project. Set discount rate at 10% as speciied. Rational investors would choose a riskier investment only if they feel the expected return is high enough to justify the greater risk. All investment risk is not the same. A inancial market is information eicient if at any point in the time, the prices of securities relect all information available to the public.