Net Present Value - 1958 Words

Critics to DCF methods Ducht an UK companies * However, it is found inappropriate to use DCF methods for investments that have got strategic implications. * There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible. Therefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project. Capital inv appraisal of new technologies: Problems, misconceptions and research directions * Specifically, it has been alleged that the traditional appraisal†¦show more content†¦The missapplication of capital investment appraisal techniques * Surveys of capital budgeting practices in the UK and USA reveal a trend towards the increased use of more sophisticated investment appraisals requiring the application of discounted cash flow (DCF) techniques. Several writers, however, have claimed that companies are underinvesting because they misapply ormisinterpret DCF techniques. * the only justification we can think of for using the accounting rate of return method is because top management believe that reported profits have an impact on how financial markets evaluate a company. This is further reinforced in many companies by linking management rewards to short-term financial accounting measures. Thus a project’s impact on the financial accounting measures used by financial markets would appear to be a factor that is taken into account within the decision-mak ing process. * Dimson and Marsh (1994) have expressed concern that many UK companies may be using excessively high discount rates to appraise investments and, as a result, these companies are in danger of underinvesting. In the USA it has also been alleged that firms use discount rates to evaluate investment projects that are higher than their estimated cost of capital (Porter, 1992). Conclusions: Ducht an UK companies * All the UKShow MoreRelatedNet Present Value1157 Words   |  5 Pagesobtained and that authorised capital spending was not exceeded. Investment appraisal method; There are four methods which we can use to evaluate the investments. 1) The Payback period 2) The accounting rate of return 3) The net present value method 4) The internal rate of return method A. The Payback period; The payback period is the number of years it takes to recover its initial investment. This method assists with the project risk and liquidity. The projects with theRead MoreNet Present Value1875 Words   |  8 Pagesyear and reported the following information. The company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of $83,552. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. How much retained earnings does the firm have? a. $ 405,648 b. $243,648 c. $167,918 d. $573,566 6.) Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199Read MoreNet Present Value/Present Value Index2559 Words   |  11 PagesNet Present Value/Present Value Index The management team at Savage Corporation is evaluating two alternative capital investment opportunities. The first alternative, modernizing the company’s current machinery, costs $45,000. Management estimates the modernization project will reduce annual net cash outflows by $12,500 per year for the next five years. The second alternative, purchasing a new machine, costs $56,500. The new machine is expected to have a five-year useful life and a $4,000Read MoreNet Present Value and Salvage Value1144 Words   |  5 Pages------------------------------------------------- FINC5001 Capital Market and Corporate Finance ------------------------------------------------- Workshop 5 – Capital Budgeting II 1. Basic Concepts Review a) In applying Net Present Value, what factors do we include, and what factors do we ignore? Use cash flows not accounting income Ignore * sunk costs * financing costs Include * opportunity costs * side effects * working capital * taxation * inflation Read MoreNet Present Value Essay940 Words   |  4 Pagesgrow. Although, this is true it much more valuable to know about the value and benefit of the investment. Selecting the best investment choice will ensure growth in the future and will generate value. The problem typically arises when trying to utilize capital budgeting skills in determining different tasks with the same risk. There are many ways to determine the correct return gained from investments. The (NPV) Net Present Value has proven to be the best method for organizations to use. NPV givesRead MoreNet Present Value Essay603 Words   |  3 Pages1. Basic present value calculations Calculate the present value of the following cash flows, rounding to the nearest dollar: a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return. b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return. c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return. d. An annual receipt of $8,000 for threeRead MoreNotes On The Net Present Value1462 Words   |  6 PagesQuestion C [1] The Net Present Value [NPV] is the total sum of the present values of all the expected cash flows. For a project with a normal cash flows, this would mean that the NPV is the present value of expected cash flows minus the initial cost of the project. The formula is as such; NPV = -CF0 + CF1 (1+k)-1 + CF2 (1+k)-2 + †¦ + CFn (1+k)-n where; CF0 is the initial investment outlay, or cash outflow CFt is the after-taxed cash inflows at time t k is the required rate of return for the projectRead MoreNet Present Value ( Npv )1530 Words   |  7 PagesNet present value (NPV) is a discounted cash flow technique used to determine the overall value of a project or a succession of cash flows (Blocher et al, 2008). See Appendix 1 for a simplified calculation. Belli (2001) argues that NPV is more suitably applied to mutually exclusive projects; these types of projects are those that if accepted, prevent other contending projects to be approved (Mowen et al, 2009). NPV is understood to be an absolute measure, therefore when selecting between mutuallyRead MoreNet Present Value and Project3264 Words   |  14 Pagesbe 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approx imate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project inRead MoreNet Present Value and Question5593 Words   |  23 Pagesof capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive. Question 2 If it is feasible to undertake a project irrespective of the decision concerning the acceptance of another, the two projects are said to be: A) independent. B) dependent. C) mutually exclusive. D) none of