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Capital Budgeting
How can we know that: (in term of the initial investments and time of cash flow and the relation between them)
Does the decision rule adjust for the time value of money?
Yes, the decision rules do adjust for the time value of money. This can be accomplished in a variety of different methods. For example, if a NPV calculation is used then the initial investment and the future cash flows will be converted into their present values and summed. Using the present value of future streams of incomes is one way of factoring in the time value of money.
Does the decision rule adjust for risk?
Yes, the decision rule also adjusts for perceived risk in an investment analysis. In a NPV calculation, a percentage rate will be determined which represents the risk free rate plus an additional rate that represents the level of risk in an investment....
For example, if the required rate of return is 12% and the NPV is calculated to be zero, then the investors will still receive the 12% return that they planned for. Risk is automatically factored into a NPV calculation.
3. Does the decision rule provide information on whether we are creating value for the firm?
Yes, any positive NPV value means that the firm will create excess value over the required rate of return. For example, if the NPV was calculated to be $10,000 and the required rate of return was 12%, then investors would receive the 12% return as well as 10,000 in added value after the time value of money was considered.
4. What is the relationship between the initial investment and NPV? ( what will increase or decrease)
The initial investment is considered in part of the NPV calculation. It is usually designated as the first cash flow at time…
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
"MIRR: A better measure." Business Horizons. 51(4), 321-329. Cited in: http://econpapers.repec.org/article/eeebushor/v_3a51_3ay_3a2008_3ai_3a4_3ap_3a321-329.htm McClure, B. (n.d.). "Taking Stock of Discounted Cash Flow." Investopedia. Cited in: http://www.investopedia.com/articles/03/011403.asp?partner=answers "Modified Internal Rate of Return." (2009). Cited in: http://www.thinkanddone.com/finance/mirr.html Parrino, R, & D. Kidwell. (2009). Fundamentals of Corporate Finance. (Vol. 1, Ed.). Wiley Custom Solutions. Smart, S. And WL. Megginson. (2008). Corporate Finance. Thompson Learning. Sullivan, A. And S. Sheffrin. (2003). Economics: Principles in Action. Prentice-Hall. The IRR is the rate of return that makes the
When a range of options are presented to management, the capital budgeting process must be used to determine the costs and cash flows associated with each option. However, the capital budgeting process is only as valuable as the inputs and assumptions. If the assumptions are not grounded in reasonable analysis and quality research, the process will not yield a valuable result. If the numbers that are input into the
1 0.107 0.107 1.788005 4.37% 7.24% D 20 Lev 1.2925 0.120475 0.11038 1.653411 4.05% 7.22% D 50 Lev 1.87 0.1609 0.16045 -0.1731 -0.44% 7.05% 5. The only project that is unacceptable is Project D. At the 50% leverage level. This has a negative NPV. The other projects at each leverage level all have positive net present values. The following graph shows the NPVs for the different projects: 6. My objective in making this decision is to maximize firm value. The projects are mutually exclusive. I would use NPV as the main
I would suggest therefore that the authors work towards a practical output. Their underlying assumptions about the nature of capital budgeting for research and development projects are strong, but their output is unwieldy. Coming from the perspective of someone who would be engaged in the capital budgeting exercise, I would want to have a model to which I assign my staff and expect a useable result. Interestingly, the authors appear to
Capital Budgeting The aim of hospitals is to measure and improve the quality of health care service for the patients. Patient satisfaction is the foremost concern. However, to run a hospital, there are a lot of other factors are also involved; e.g. managing cost, budgeting, optimizing operations and increase patient satisfaction level. In order to achieve the desired level of performance, the hospital needs to be up-to-date with the latest technology. In