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Finance
One of the biggest differences between new capital projects and renewal/replacement projects is that the variables are less known. The cash flow for the next few years is subject to a higher degree of uncertainty, but so too is the risk profile for the project. The latter is especially important when the project is in an entirely new business, and the firm has very little concrete information to go on. The reality is that for renewal projects, there is a lot more certainty about everything, and that makes a difference in the capital budgeting process because the numbers are more reliable and the company knows that the discount rate appropriately reflects the risk associated with that project. It must be cautioned, however, to remember that incremental cash flows only should be incorporated into the calculation for renewal projects, not money that has already been committed to the project (Investopedia, 2016).
Interest charges are not included in the cash flows for the project because interest represents a financing charge. Financing charges are reflected in the discount rate, which includes the cost of capital, which itself includes the cost of debt. Because of the Modigliani-Miller principle, financing charges are not included as cash flows...
There is strategic risk, which relates to operating in that industry at that moment in time. An example would be whatever risk was inherent in making PDAs when the smartphone was invented and killed the category. There is also firm-specific risk that relates more to the company than the industry, such as the reality that firms with one product face greater risk than firms that have a more diversified portfolio. There are legal risks relating to any number of laws, and political risks that relate to the influence of government and government action over business. Political risk can vary dramatically across different countries (Griffin, 2016).
There are different financial risks, including credit risk (related to extending credit to customers), foreign exchange rate risk (when dealing in other currencies) and interest rate risk. There might be reputation risk, especially for companies that are just starting to build their brand. The value of that brand is sometimes at risk if the company has a problem with a key product, or if the company itself faces scandal. Lastly, there are…
References
Investopedia (2016). Applying NPV analysis to project decisions. Investopedia. Retrieved July 19, 2016 from http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/applying-npv-net-present-value-project-decisions.asp
Investopedia (2016). Modigliani and Miller's capital structure theories. Investopedia. Retrieved July 19, 2016 from http://www.investopedia.com/walkthrough/corporate-finance/5/capital-structure/modigliani-miller.aspx
Griffin, D. (2016). Types of business risk. Houston Chronicle. Retrieved July 19, 2016 from http://smallbusiness.chron.com/types-business-risk-99.html
Hay Taxi should replace the new vehicles after five years. This decision comes about after a capital budgeting analysis that illustrates the different possible scenarios for replacing the vehicles. A net present value calculation was done for each scenario to determine which scenario delivered the highest total net present value over the next six years for the Hay Taxi company. There is little difference between replacing the vehicles after year
Question Berk and DeMarzo (2020) exemplify the variances between the three key approaches companies utilize for capital budgeting with leverage and within imperfect markets. These approaches comprise the Weighted Average Cost of Capital (WACC) method, the Adjusted Present Value (APV) Method, and the Flow-to-Equity (FTE) Method.The Weighted Average Cost of Capital methodWACC refers to a weighted average of the cost of debt, the cost of equity, and also the cost
Budgeting as an Adequate Tool for Planning and Control in Organizations: A budget apart from being a coordinated and comprehensive financial plan for the resources and operations of a given future period is also intended to promote the managerial functions of control and planning. Over the years a budget has been perceived as a tool for forced planning as it constitutes the most important and basic management functions since other managerial
The reason for this shortfall, as noted by the Balance Budget website, emanates from pension costs, previously agreed to cost of living pay increases, rising health care costs overall and a general weakness in the overall economic recovery that has ensued, albeit very slowly, since the end of the so-called "Great Recession" period that ended in approximately 2009 for the nation as a whole. The balance budget website notes that
28% This gives project B. An IRR of -0.028% Part C Using the above assessments each may indicate which investment may be preferred. Using the payback period project a has a payback period of 4 years, whereas project B. has a payback period of 3 years 8 months. If the fastest payback period is preferred than project B. will be chosen. The NPV which discounts the net revenues into a net present value shows
Financial Situations The first calculation is the cost of debt. This is done on an after-tax basis. The before-tax cost of debt is 4% and the tax rate is 35%. So the after-tax cost of debt is 65% of the before-tax cost of debt, thus 2.6%. The cost of retained earnings is calculated by dividing the current stock price by the expected dividend. This gives a value of 3.85%, to which