¶ … Financial Calculations
The Pickens Mining company has to make a decision with respect to whether or not it wants to develop a strip mine. Doing this is to fulfill a contract that it does not currently have. The decision needs to be based on careful analysis of the different cash flows, ensuring that only those incremental to this decision are included.
In a capital budgeting situation, only the incremental cash flows are taken into account in the calculation (Investopedia, 2016). One of the key issues that arises is with respect to opportunity cost. In this case, the company already owns the land, so going ahead with the project would mean that the land cannot be used for any other purpose. This is an interesting issue because the sunk cost associated with buying the land in the first place is excluded outright as not incremental. Selling the land, however, is just one possibility in a universe of possibilities -- this is not a binary decision. That is where opportunity cost gets tricky in capital budgeting. A non-binary decision opens up multiple opportunity costs, none of which may be actually used. In this case, there is...
Pickens could theoretically sell the land for $7.4 M (it thinks) but if it was not planning to do so then this is not an incremental cost. The company can extract benefit from that land in many ways, and with many potential timeframes. Deciding what to do with the land is a whole other decision -- it may prove to be a better number than using the land, an analysis that should be conducted. If this is a whole other decision, that means it is not incremental to this particular decision.
With the equipment, only the first four years of depreciation is incremental to this decision, because the company intends to use the equipment for other projects following this one, rather than selling it. What the company chooses to do with the equipment at that point in time -- it clearly has options -- is its own decision. We only know that the equipment will accrue a depreciation tax benefit for four years on this project, so that is all that can be included, though of course the 7-year MACRS rates would still apply.
The decision to donate the land as a park is not incremental to the decision to…
NPV profiles for Franchises L. and S. At what discount rate do the profiles cross? NPV Due to the way that the revenues vary, they actually cross at a couple different points. Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%? NPV IRR What
The IRR too does not distinguish between the positive investing or negative borrowing+ investing situation, whilst the NPV makes a clear distinction. NPV is superior to IRR for mutually exclusive investments. Finally, NPV and IRR make different assumptions when it comes to reinvestment assumptions. This can result in conflicts and crossover in ranking of mutually exclusive projects. Profitability Index (PI) The PI calculates the present value of a project compared to its
Integrated Business Plan Brief Outline of the Business Venture Organizational Issues and Expansion Legal Issues and Expansion Business Strategy Technology Financial Competitiveness and Expansion Allocation of Funds Pro-forma Cash Flow Net Present Value Internal Rate of Return (IRR) Profitability Index (PI) Payback Analysis Marketing/Sales and Expansion Marketing Mix Analysis and Expansion Mediums of Marketing An Integrated Business Plan Management is basically a synergy of four elements i.e., planning, organizing, leading and controlling (Chris & Alan, 1999). The essence of management and its particulars are very important
Approximately 19% of the short-term liabilities in the form of notes payable and other short-term debt. The long-term liabilities consist of long-term debt and other miscellaneous liabilities. The debt portion of this represents approximately 39% of the total long-term liabilities. Johnson & Johnson has issued notes onto the market that mature in 2017, comprising the bulk of the long-term debt. The calculate the market value capital structure of JNJ, we need
For company B, the risks associated with cash flows are higher than that for company A, and are in the order of 11%, but nevertheless, the IRR on the cash flows is higher than the minimum required rate of return of 11% making this investment also attractive. As these two projects are mutually exclusive, and considering only IRR investment selection criteria, purchase of company B. with IRR of 14,305%
ABC Supermarket PLC Case Analysis Ratio Analysis The results of ABC Supermarket's financial performance are very different from the comments shared by the Chairman in the 2009 Annual report. Based on the evaluation below, the company's cash, profitability, and liquidity positions all weakened between 2006 and 2009. They also had an issue with managing inventory. However, the stock price increased successively over this period of time. This may have been a factor of