Foalsa Ltd have been conducting investment appraisal on two potential new projects the company is looking at undertaking. The management accountant is new to the business and has followed a template calculation for the NPV and IRR that was set up by the previous management accountant for a past project. Having completed the calculations, the management accountant discovered the cost of capital figure the business uses has changed since the template was constructed and is in fact 2% higher. What will be the effect of correcting this error on the NPV and IRR figures? Impact on NPV Impact on IRR A Increase NPV IRR unchanged Decrease NPV IRR unchanged C NPV unchanged Decrease IRR Decrease NPV Increase IRR
Foalsa Ltd have been conducting investment appraisal on two potential new projects the company is looking at undertaking. The management accountant is new to the business and has followed a template calculation for the NPV and IRR that was set up by the previous management accountant for a past project. Having completed the calculations, the management accountant discovered the cost of capital figure the business uses has changed since the template was constructed and is in fact 2% higher. What will be the effect of correcting this error on the NPV and IRR figures? Impact on NPV Impact on IRR A Increase NPV IRR unchanged Decrease NPV IRR unchanged C NPV unchanged Decrease IRR Decrease NPV Increase IRR
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Foalsa Ltd have been conducting investment appraisal on two potential new projects the company is looking at undertaking. The management accountant is new to the business and has followed a template calculation for the NPV and IRR that was set up by the previous management accountant for a past project. Having completed the calculations, the management accountant discovered the cost of capital figure the business uses has changed since the template was constructed and is in fact 2% higher. What will be the effect of correcting this error on the NPV and IRR figures?
Impact on NPV Impact on IRR
A Increase NPV IRR unchanged
B Decrease NPV IRR unchanged
C NPV unchanged Decrease IRR
D Decrease NPV Increase IRR
Transcribed Image Text:Foalsa Ltd have been conducting investment appraisal on two potential new projects
the company is looking at undertaking. The management accountant is new to the
business and has followed a template calculation for the NPV and IRR that was set
up by the previous management accountant for a past project.
Having completed the calculations, the management accountant discovered the cost
of capital figure the business uses has changed since the template was constructed
and is in fact 2% higher.
What will be the effect of correcting this error on the NPV and IRR figures?
Impact on NPV
Impact on IRR
Increase NPV
IRR unchanged
Decrease NPV
IRR unchanged
NPV unchanged
Decrease IRR
Decrease NPV
Increase IRR
B
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