Capital Budgeting Decision-Making Term Paper

Length: 2 pages Subject: Economics Type: Term Paper Paper: #15506815 Related Topics: Capital Budgeting, Net Present Value, Decision Making, Finance
Excerpt from Term Paper :


The cost of debt is 13%. The cost of common stock, using CAPM, is as follows:

The cost of preferred stock is (10/90)(1-(2/90) = (.11111) / (.9778) = 11.3%

The company's WACC is (.3)(13)+(.16)(11.3)+(.54)(14.15) = 13.349%

The expected cash flow from the investments is the weighted average:





The standard deviation for the smelting is 2133, while the standard deviation of paving is 10,234.

The coefficient of variation for the smelting is 0.1315 for the smelting and .6478 for the paving.

The paving option has the higher risk. The standard deviation is a good measure of risk and the paving option has a much higher standard deviation. Further, it has a higher coefficient of variation as well. On both measures, the paving option has the higher risk.

7/8. The net present values and IRRs for these two are as follows. First, the smelting:


The IRR is higher than the cost of capital. However, the paving project was given a higher hurdle rate, based on the WACC + 3%, so it has a negative NPV, and would therefore be rejected. In addition, it has the lower IRR, which means that it would be rejected when compared with the smelting project anyway, because they are mutually exclusive.

There is, however, a conflict between the two methods. The use of a higher hurdle rate for the paving project is inconsistent. The point of using the company's WACC is that it reflects the risk associated with the company's ability to raise capital. The two projects should be evaluated on the basis of the WACC -- whether…

Cite this Document:

"Capital Budgeting Decision-Making" (2015, August 04) Retrieved December 1, 2022, from

"Capital Budgeting Decision-Making" 04 August 2015. Web.1 December. 2022. <>

"Capital Budgeting Decision-Making", 04 August 2015, Accessed.1 December. 2022,

Related Documents
Capital Budgeting Decision Leasing Vs.
Words: 1119 Length: 3 Pages Topic: Urban Studies Paper #: 82874748

Some people compare buying a car to renting an apartment: "you pay a monthly fee to use it but don't own it -- and aren't making payments toward ownership. The leased vehicle remains the property of the lessor -- the company that issued the lease" (Peters 2009). However, cars depreciate rather than appreciate in value, unlike real estate. Monthly lease payments are cheaper than payments on a new car,

Capital Budgeting and Government Regulations Airline Industry
Words: 1168 Length: 4 Pages Topic: Business Paper #: 42796190

Capital Budgeting and Government Regulations Airline Industry LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY Government regulation: Why or why not Major reasons for government involvement in a market economy Interests of stockholders and managers: The convergence Airline: Merger or new capital investment LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY For profit organizations have shareholder's profit maximization as the main aim to pursue. Traditional managerial economics expects that all projects/investments having positive net present value (NPV) shall be initiated by

Capital Budgeting Mission of Cer
Words: 1178 Length: 4 Pages Topic: Business Paper #: 48287069

Litzenberger and Joy (1975) note that in a decentralized system, quantitative measures are more common for evaluating projects, but they also note that for larger projects there is some degree of centralization. This is the case with Stryker, where the most substantial projects are approved by the Board of Directors. Ang (1986) notes, however, that there can be agency problems where the interests of the division are misaligned with the

Capital Budgeting for Guillermo Furniture Guillermo Navallez,
Words: 1012 Length: 4 Pages Topic: Economics Paper #: 6402975

Capital Budgeting for Guillermo Furniture Guillermo Navallez, owner of the relatively small yet highly successful furniture manufacturer Guillermo Furniture, is faced with a tough decision. Due to changes in the industry an in his operating atmosphere, Guillermo is unable to continue competitively running his company as he has for the past decades, with a crew of skilled laborers building furniture and with distribution handled essentially by the company itself. He must

Capital Budgeting if the Project
Words: 558 Length: 2 Pages Topic: Economics Paper #: 73022560

Any discount rate lower will yield a positive net present value, up to $126,000. Part II. For capital budgeting decisions, NPV is a better metric. NPV and IRR are very similar in many respects, and they carry the same reliance on the same underlying assumptions about the underlying cash flows. Additionally, they both relate to the company's cost of capital. IRR is typically used as a go/no-go threshold, whereas NPV measures

Capital Budget in Recreation in
Words: 1338 Length: 5 Pages Topic: Business Paper #: 62456257

To solve these emerging needs of the company to satisfy the demand in the market, it is necessary to invest into expanding of the services offered and shifting the existing concept of the club. Firstly, it is necessary to expand the space occupied by renting out additional premises and organizing Spa procedures there. This will require also investment into necessary human resources, such as hiring Spa administrative and consultants