Cori's Meats is looking at a new sausage system with an installed cost of $304,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $30,000. The sausage system will save the firm $116,000 per year in pretax operating costs and the system requires an initial investment in net working capital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project? Security F has an expected return of 11 percent and a standard deviation of 47 percent per year. Security G has an expected return of 14 percent and a standard deviation of 63 percent per year. a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent of Security G? b. If the correlation between the returns of Security F and Security G is. 15, what is the standard deviation of the portfolio described in part (a)? One potential criticism of the internal rate of return technique is that there is an implicit assumption that the intermediate cash flows of the project are reinvested at the internal rate of return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and calculate the internal rate of return of the two cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment rate used to calculate the future value is different from the internal rate of return, the internal rate of return calculated for the two cash flows will be different. How would you evaluate this criticism?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Cori's Meats is looking at a new sausage system with an installed cost of
$304,000. This cost will be
end of which the sausage system can be scrapped for $30,000. The sausage system will save the firm
$116,000 per year in pretax operating costs and the system requires an initial investment in net working
capital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the
this project?
Security F has an expected return of 11 percent and a standard
deviation of 47 percent per year. Security G has an expected return of 14 percent and a standard
deviation of 63 percent per year.
a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent of
Security G?
b. If the correlation between the returns of Security F and Security G is. 15, what is the standard
deviation of the portfolio described in part (a)?
One potential criticism of the
an implicit assumption that the intermediate cash flows of the project are reinvested at the internal rate
of return. In other words, if you calculate the
project at the required return, sum the future values, and calculate the internal rate of return of the two
cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment
rate used to calculate the future value is different from the internal rate of return, the internal rate of
return calculated for the two cash flows will be different. How would you evaluate this criticism?
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