FINE 2000 Chapter 8: CHAPTER-8

26 views10 pages

mag0sea

10 Feb 2017

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

The capital budgeting decision of the firm is focused on finding out investments that maximize the value of the firm. Suppose, you are given the opportunity to buy a building today for ,000 and a guarantee of being able to sell it next year for ,000. Npv = pv of cash flows initial investment. The present value is the only price that satisfies both buyer and seller. In general, the present value is the only feasible price, and the present value of the property is also its market price or market value. Opportunity cost of capital expected rate of return given up by investing in a project. Basically the rate of return we could have earned if we had invested that money to earn interest. The discount rate used to discount a set of cash flows must match the risk of the cash flows.

Related Questions

Fox Enterprises is considering expanding into the growing laser copier business. Fox estimates that this expansion will cost $1.8 million and will generate a 20 year stream of expected net cash flows amounting to $400,000 per year. The company's weighted cost of capital is 15%.

A. Compute the net present value of the laser copier project using the company's weighted cost of capital and the expected cash flows from the project.

B. Using the risk-adjusted discount rate approach, management has decided that this project has substantially more risk than average and has decided that it requires a 24 percent expected rate of return on projects like this. Recompute the risk-adjusted net present value of this project.

rubymuskrat658

Which of the following statements are true? Select 4 that apply. (4 points)

Discounted payback method of capital appraisal ignores cash flows beyond the discounted payback period.

The net present value is found by discounting all positive cash flows at the projectâs cost of capital.

The project is accepted if the IRR is less than the projectâs cost of capital.

The IRR is the discount rate which forces the present value of a projectâs future cash flows to equal the future value of its costs.

Firms often choose among mutually exclusive projects on the basis of the present value of future costs.

To use the CAPM approach in capital budgeting, we estimate the firmâs beta, multiply this by the market risk premium and add the firmâs risk premium to the risk-free rate to obtain the firmâs cost of retained earnings or cost of equity.

The best proxy for the risk-free rate is the yield on treasury bonds.

Floatation costs are generally material when looking at its effect on the after-tax cost of debt.

burgundygnat457

Determine whether the following statements are true or false:

-The internal rate of return will equal the discount rate when the net present value equals zero.

-The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects.

-The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

-Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company's existing assets.

-When several sign reversals in the cash flow stream occur, a project can have more than one IRR.

FINE 2000 Chapter 8: CHAPTER-8

Document Summary

Get access

Related Documents

FINE 2000 Chapter Notes - Chapter 8: Payback Period, Cash Flow, Net Present Value

FINE 2000 Chapter Notes - Chapter 8: Gm High Feature Engine, Net Present Value

FINE 2000 Lecture Notes - Lecture 1: Payback Period, Opportunity Cost, 0 (Year)

Related Questions