Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: WACC - NPVA- Time 0 1 NPVB- 2 3 4 5 6 7 a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? Provide your answer after you've completed all analyses. @ 12% cost of capital Expected Net Cash Flows Project A Project B ($375) ($575) ($300) $190 ($200) $190 ($100) $190 $600 $190 12% $600 $190 $926 $190 ($200) $0 T @ 18% cost of capital WACC = NPVA- NPV B= b. What is each project's IRR? 18% Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately. c. What is each project's MIRR at a cost of capital of 12 %? Atr=18% ? Hint: note that B is a 6-year project. @ 12% cost of capital MIRRA= MIRR B = Project B d. What is the regular payback period for these two projects? Project A Time period Cash flow Cumulative cash flow payback calculations Time period Cash flow Cumulative cash flow payback Payback using intermediate calculations 0 0 $0 0 1 1 $0 @18% cost of capital MIRRA- MIRR 8 = 0 2 2 $0 0 3 $0 0 4 4 $0 0 5 5 $0 $0 6 6 $0 $0 7 7 $0 $0
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.
Comparing Investment Decision Criterion. Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criteria for accepting or rejecting independent and mutually exclusive projects under each rule.
Payback period
Modified
Internal rate of return
Profitability index
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