MAN LTD is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cash flows of the projects are as follows: Year Project M Project N “000” “000”
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
MAN LTD is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cash flows of the projects are as follows:
|
Year |
Project M |
Project N |
|
|
“000” |
“000” |
|
0 |
(200) |
(200) |
|
1 |
35 |
218 |
|
2 |
80 |
10 |
|
3 |
90 |
10 |
|
4 |
75 |
4 |
|
5 |
20 |
3 |
Required:
- Calculate the
Internal Rate of Return for Project M and Project N and Recommend, with technical reasons, which project you would undertake (if any) . - “
Net present value has been rated by majority of the financial experts as the most reliable project appraisal technique.” Do you agree with this assertion
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