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Therefore, Clink should only utilize the lease option is the lease is valued at less than £230,000 per year.
Some of the factors that might influence this decision would be the estimated life span of the machinery and the estimated resale value. The longer the estimated life span of the machinery and the greater the estimated resale value, the less likely the lease is to be a viable option. However, there is always a price at which the lease could be more effective.
However, Clink would want to consider the taxation effects of the two options before coming to a decision. Another consideration should be the robustness of the sales assumptions. The lease creates an obligation and that leverage increases the riskiness of the venture. This could affect the discount rate, but if we assume that we will leave the discount rate the same, we must understand that Clink will…
Net Present Value (NPV) decision rule. Describe how is the NPV rule is related to a cost-benefit analysis, and how is it related to the Valuation Principle.
The Net Present Value decision rule basically states that an investment should be accepted if its net present value is greater than zero, but otherwise rejected. The NPV of an investment is the present value of its cash inflow minus the present value of its cash inflow. One may compute NPV by identifying all cash flows, determining and applying the discount rate, and summing all of the present values. The valuation principle looks at earnings, revenues, cash flow, equity, dividends, and subscribers in order to determine the value of company. This whole value is then divided by the number of shares in a company, to determine a per-share value.
Explain the implication the Law of One Price has for the price of a…
Investopedia. 2011. Perpetuity. Retrieved from:
Investopedia. 2011. Present value of an annuity. Retrieved from:
Obviously the easiest and most error-free way of doing this is in Excel. Thus, we get the following table for the NPV calculation.
Google should accept the project, because it has a positive net present value. All projects with a positive net present value add to shareholder wealth. Unless there is a comparison between two mutually exclusive projects, any project with a positive NPV should be accepted. In Google's case, given how much cash it has, it is hard to imagine that this project would be mutually exclusive to another.
How Acquisitions Work
The argument for an acquisition is that the purchasing company feels that the combined value of the two firms is greater than the sum of the parts. The first assumption is that markets are efficient, such that the stock price of Groupon reflects the expected present value of its…
Lachapelle, T. (2012). Buying groupon hard for anyone as growth slows: real m&a. Retrieved December, 2012 from http://www.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw
Yahoo! Finance: Google. (2014) Retrieved January 20, 2014 from http://finance.yahoo.com/q?s=GOOG&ql=0
Yahoo! Finance: Groupon. Retrieved January 20, 2014 from http://finance.yahoo.com/q?s=GRPN&ql=0
Business -- Corporate Finance - Net Present Value - Mergers & Acquisitions, Parts 1 &
Google, Inc. is analyzing the possible added value of a project initially costing $1,750,000.00 Calculating the net cash flows for 5 years, the 15% cost of capital, the present value of cash flow for 5 years and the net present value all allow the reviewer to determine the added value that might encourage the company to pursue this project. Even as Google, Inc. is advised to pursue this project, its shareholders are advised against the acquisition of Groupon, as the downsides and risks considerably outweigh the possible advantages of acquisition. In contrast, Groupon shareholders should seek the acquisition based on the balance of advantages and disadvantages that such an acquisition would pose for them.
Capital Budgeting Decision for Google Shareholders and Executives.
I recommend that the executives and shareholders of Google pursue the…
Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. New York, NY: McGraw-Hill.
Gaughan, P.A. (2011). Mergers, aquisitions and corporate restructurings. Hoboken, NJ: John Wiley & Sons, Inc.
Lachapelle, T. (2012, December 11). Buying Groupon hard for anyone as growth slows: Real M&A. Retrieved on December 16, 2013 from www.bloomberg.com Web site: http://www.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw
McClure, B. (2009, February 25). Mergers and acquisitions: Definition. Retrieved on December 16, 2013 from www.investopedia.com Web site:
In other words: Lead users are individuals who use a product that has a number of unknown needs and who also benefit if they find a solution to those needs. This is unique in that it takes a different approach to traditional market research -- instead of collecting information from users at the center of the target market, it collects information about both needs and solutions from the leading edge of the target market. The method involves four steps: 1) Begin the Lead User process model; 2) Identify and extrapolate needs and trends; 3) Find out who the lead users are and interview them; 4) Refine data, use a workshop for concept design (Urban and von Hippe, 1988).
This idea is advantageous in that it helps with breakthrough products and leading trends prior to their becoming trends. It also establishes leadership in a market instead of reacting to trends. Innovative…
Hallowell, D. (January 2 005).w Analytical Hierarchy Processes -- Getting Oriented.
Six-Sigma.com. Cited in: http://www.isixsigma.com/index.php
Saaty, T. And Kirti, P. (2008). Group Decision Making. Pittsburg, PA: RWS Publications.
The net present value calculation is the best way to make a capital budgeting decision. NPV takes the incremental cash flows from a project and then discounts them to present-day dollars. This technique allows managers to not only identify the incremental cash flows associated with a project, but also allows them to discount future cash flows to present day, so as to account for the effects of inflation.
In this case, we have the following schedule of cash flows:
If T-Mobile is considering a project with these flows, and the company has a discount rate of 4%, then the NPV of the project would be as follows:
Thus, this project has a net present value of $ -170.68. A project should only be accepted if it has a positive net present value. The reason for this is that the discount rate effectively represents…
ABMN. (2010). Sprint Nextel and T-Mobile merger rumors return after comments from Sprint CEO. American Banking & Marketing News. Retrieved March 26, 2012 from http://www.americanbankingnews.com/2010/07/15/sprint-nextel-nyse-s-and-t-mobile-merger-rumors-return-after-comments-from-sprint-ceo/
Baker, S. (2000). Perils of internal rate of return. University of South Carolina. Retrieved March 26, 2012 from http://hspm.sph.sc.edu/courses/econ/invest/invest.html
Brealy & Myers. (1996). What is the discount rate a firm should use in capital budgeting? McGraw-Hill Companies. Retrieved March 26, 2012 from http://people.stern.nyu.edu/kjohn/courses/session03.ppt
McClure, B. (2012). The basics of mergers and acquisitions. Investopedia. Retrieved March 26, 2012 from
Net Present Value (NPV) is a financial technique used in capital budgeting to evaluate the profitability of a project. To determine the viability of investment, it is critical to invest when NPV is positive or greater than zero. Organizations face option to move forward with the investment or to abandon an investment. When an NPV is greater than zero, the investment should be accepted. The decision tree is very critical in the investment analysis. Using NPV could assist in making right investment decision. From fig 1, John could only accept the investment since it is revealed that NPV of an investment is more than 1 which is profitable. However, when the profit is $0. It will not be possible for John to pursue the investment
Fig 1: Decision Tree
In the contemporary business environment, investor should consider volatility of stock before making an investment…
Bodie, Zvi; Alex Kane, Alan J. Marcus (2008). Investments (7th ed.). New York: McGraw-Hill/Irwin.
Brigham, E.G. Houston, J.F (2011). Fundamentals of financial management. Cengage Learning, UK.
Brealey, R., Myers, S., and Allen, F. (2008) Principles of Corporate Finance, 9th edition, McGraw-Hill.
Hillier, D., Ross, S., Westerfield, R., and Jaffe, J. (2005) Corporate Finance, 7th edition, McGraw-Hill.
Mobile Job Centers
The mobile job centers will provide a positive net present value by Year 6, and will add value from that point onward. The project will be deeply in the red for most of the early years. The project has high upfront costs relating to the acquisition and outfitting of the buses. Furthermore, the ongoing cost structure is very high - costs like a Director's Assistant are absolutely unnecessary and driver salary is really high for that type of job. So there are some issues with the cost structure as presently proposed. On one hand, the project will have a positive NPV is left to run long enough, but those results are based on assumptions that may not hold up well into Year 6. Basically, the project's positive NPV rests on long-run cumulative effects, so in order to believe these projections, we would need to see some evidence…
My company is considering a certain project undertaking. Our CFO is uncertain on whether or not to embrace the project. Having estimated the cash flows and NPV for the project, and having an estimated NPV as +$10, I am tasked with the role of analyzing the feasibility of the said project on the basis of the cash flows and NPV estimates. In so doing, I will address the kind of analysis I would make use of to make a case for or against the project and how I would justify my decision.
It is important to note, from the onset, that businesses must ensure that all decisions made with regard to investments are sound. This is more so the case given that in addition to most projects requiring significant capital outlay, once a project commences, it could be quite expensive (or in some instances impossible) to abandon midway.…
Value of the Future Stream of Cash Flows Equals Value of the Discounted Amounts of These Cash Flows
If the bank is paying 4% annual interest rate on the banking account, the present value of the future $1,250 in one years is worth today
PV = FV/(1 + r)
And thus future value of $1,250 with the discount rate of 4% is approximately $1,202.
Account A is earning 6% interest yearly and will be worth $3,000 in one year, employing the mentioned above formula, the present worth of this account is $2,830. Account B. is earning the same 6% yearly interest rate and will be worth $4,000 in two years. Present value of this future payment can be calculated employing the following formula:
PV = FV/(1 + r)^
Future value is discounted by the 6% interest rate foregone by two years and that is why it is necessary to use…
Fundamentals of Corporate Finance, 3rd Ediction, Brealey and Meyers.
Fundamentals of Corporate Finance, 3rd Ediction, Brealey and Meyers.
This in turn gives the financial professional better idea of the stock's risk behavior.
The equation used in this security market line relationship is as follows:
Mathis, CAPM, par. 3)
The measure of systematic risk is considered Beta or bi while E[Ri] is equal to the expected return on asset I and Rf is the risk-free rate. E[Rm] is the expected return on the market portfolio and E[Rm] - Rf is the market risk premium for the stock. Once the Beta is known then the risk and rate of return can be found.
APT is different because not only can forecast for the long-term, it can also work for the short-term scenario. This fact makes it the better of the two theories because it gives the financial professional more tools to assess risk and the rate of return. APT does this by using a model that captures all the data.…
Anonymous. "Risk and Return." The Economist (1991): 1-2.
APT: Risk Models and Portfolio Analytics. 22 Dec 2004 http://www.apt.com/..
Capital budgeting needs vision." Business Line. Islamabad: Jul 21, 2003. pg. 1.
Johnson and Johnson Financial Summary. Yahoo Finance. 22 Dec. 2004 http://finance.yahoo.com/q?s=JNJ&d=t ..
Business -- Corporate Finance - Net Present Value - Mergers & Acquisitions -- SLP Facebook
the Merger of Facebook, Inc. And Twitter, Inc.
Choosing a company to merge with Facebook, Inc. is a difficult task because Facebook, Inc. is a huge, valuable, cutting-edge company. When forced to choose a prospect for merger, I would settle on Twitter, Inc. (ahoo! Finance, 2013). First, both companies are in the Technology/Internet Information Provider field, so there is some commonality of technology and service (McClure, Mergers and acquisitions: Definition, 2009). Secondly, Twitter is state-of-the-art technology, using social networking and microblogging using instant messaging, SMS or web interfaces (Twitter, Inc., 2013) with an undeniable level of popularity. Meanwhile, Facebook, Inc. is constantly striving for cutting edge forms of providing technological information. Consequently, the two companies share an aggressive corporate culture that pursues the most advanced provision of internet-based information (McClure, Mergers and acquisitions: Why they…
Yahoo! Finance. (2013, December 16). TWTR key statistics. Retrieved December 16, 2013 from finance.yahoo.com Web site: http://finance.yahoo.com/q/ks?s=TWTR+Key+Statistics
Yahoo! Finance. (2013, December 16). TWTR: Summary for Twitter, Inc. common stock. Retrieved December 16, 2013 from finance.yahoo.com Web site: http://finance.yahoo.com/q?s=TWTR
Yahoo! Finance. (2013, December 16). YHOO: Summary for Yahoo, Inc. Retrieved December 16, 2013 from finance.yahoo.com Web site: http://finance.yahoo.com/q?s=YHOO
price for the Zartek technology, the most appropriate approach is to start by looking at the value it is expected to create. The net income for each of the years have been provided. However, under the concept of the time value of money, income received in the future will have a lower value compared to the same amount held today. Inflation will erode the value of money, while money held today may be invested for a return for the future (Drake & Fabozzi, 2009). Therefore, the first stage is to look at the future net revenue streams and discount them to allow for the time value of money. Giving a present value (PV). This is undertaken by discounting each year's net revenue on a compound basis (Drake & Fabozzi, 2009). As it is assumed the interest rate for the 5 years is 7%, the discount factor used will be 7%…
Armstrong, G., Kotler, P., Harker, M., & Brennan, R. (2009). Marketing: An Introduction. Harlow: Pearson Education Limited.
Drake, P. P., & Fabozzi, F. J. (2009). Foundations and Applications of the Time Value of Money. Hoboken: John Wiley & Sons.
Nellis, J. G., & Parker, D. (2006). Principles of the Business Economics. Harlow: Prentice Hall.
PV = $15,000 / (1+.07)^1 = $14,018.69.
At 4%, this is $15,000 / (1.04) = $14,423.08
The PV of Account A is 6500 / 1.06 = $6,132.07. The PV of Account B. is 12,600 / (1.06)^2 = $11,213.96
The present value of the entire income stream is $168,459,500.
hat this example shows is that the net present value of a future cash flow increases with a lower discount rate. The reason for this is that a lower discount rate means the less purchasing power of the future cash flow is diminished. So in this situation the gold mine is worth more at a 3% rate than a 5% rate, and both are worth more than at a 7% rate.
A. The project's NPV at a discount rate of 0% is $670,000
The project's NPV at a discount rate of 2%…
Anthes, G. (2003) ROI guide: Net present value, retrieved August 2008 from: http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=78530
Investopedia. (2011). Profitability index. Investopedia. Retrieved November 7, 2011 from
A."Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 4%?"
PV at 7%
With a discount rate of 7.00% of the bank account and a span of 1 year, the projected cash flows of my money are worth $0.07 today, and this is less than the initial $15,000.00. The resulting PV of the $15,000 is $14,018.69,
However, PV at 4%
With a discount rate of 4.00% of my bank account with a span of 1 year, the projected cash flows are worth $0.08 today, which is less than the initial $15,000.00 money in the bank in one year. The resulting PV of the money in the…
It is worth noting that after three years, another machine will need to be purchased. This cost should be included (i.e. The costs for years 4 and 5) in order to adequately assess the full cost difference between the two machines. After three years, Machine 2 still has a worse NPV than does Machine a, which implies to that point that Machine a is still better. The future decision after Year 3, because it is unknown at this point, cannot be included in the calculation.
b) NPV analysis supports the answer to question a. Indeed, NPV analysis is how the answer to question a was derived. With an interest rate to work with, NPV is the most appropriate means of determining the value of each of these projects, so it is what was used. Any other method of calculating question a would be inferior, so would not make sense.
Solutions to the Present Value Problems
The study uses the formula below to solve the problems.
Original Equation: FV = PV * (1+ i) n
Manipulation: Divide both sides by (1 +i) n
Final Equation: PV = FV / (1+ i) n or PV = FV * (1+i) -n
PV = Present Value
FV =Future Value
i= interest rates n = Number of years.
Using the formula presented above, the paper calculates the PV of the $10,000 bond with the 6% of annual coupon at the end of the five-year. Using the Excel Software 2007 for the calculation, the answers to the problems are as follows:
At 6% interest rates, the PV is as follows:
PV = $10,000 / (1 + 0.06)
Using the excel formula, the solution is as follows:
=B1 / (1+B2)^
Number of Years…
The discounted payback for each project is also in the fifth year, but further along in the fifth year for Project a compared to the simple payback.
The net present value of Project a is $18,269. The net present value for Project B. is $18,690. The IRR for Project a is 18%, and the IRR for Project B. is 15%. (see Appendix B)
The cause of the ranking conflict would be that the cash flows for Project B. are weighted towards the fifth year, whereas the flows for Project a are spread more evenly throughout the project's life. The ability to re-invest the earlier flows from Project a allows that project to have a higher IRR despite having a lower NPV.
The project that should be selected is Project B. This project has the higher net present value, and that should be the criteria for determining between two mutually exclusive…
Accuracy of NPV Calculations
Accuracy of Net Present Value (NPV) Calculations
The accuracy and validity of Net Present Value (NPV) calculations has often led financial professionals to combine this measure of financial performance with others to gain greater insights into the strategic implications of decisions on projects. The fact that NPV alone cannot capture the variability of costs ands assumes linearity of costs and cash flows (Auguston, 1992). The best uses of NPV analysis are predicated on historical data where the linearity and predictive accuracy of cash flows can be achieved (Brush, 2003). Where there is a very high level of uncertainty in the financial figures or the broader business model, NPV figures are often inaccurate and only useful for showing directional, not precise, changes in the direction of investments (Phelan, 1997). With these foundational points of NPV in mind, the three businesses of a brand new retail startup, pharmaceutical…
Auguston, K.A. (1992). Four steps to the right ROI. Modern Materials Handling, 47(7), 40-40.
Brush, B.C. (2003). The past as prologue: On the accuracy of using historical averages in discounting future lost earnings to present value. Journal of Legal Economics, 13(1), 81-107.
Phelan, S.E. (1997). Exposing the illusion of confidence in financial analysis. Management Decision, 35(2), 163-168.
Calculating nvestment Values
When a firm has a number of investment options but can only undertake one, the firm is likely to undertake some assessments in order to determine which is likely to provide the optimal return. n the first scenario there are three potential factory expansion choices, with the need to determine which will create the greatest value for the firm. The investment levels and the expected net profit per annum have been supplied. This may be used as the basis for a comparison.
The assessment method used is a straightforward approach which looks at the return on the capital to be invested. t is assumed that the firm want to gain the greatest potential return and that there will be other investment opportunities for any capital that is not used to fund the factory expansion.
To calculate the expected return the expected net profit is divided by…
If it is assumed that the profit level remains the same, the use of the dividend discount model can be used to assess the firms' value
. If it is assumed that the profit level remains the same, and does not decrease, and an alternate investment over a long period of time will yield 11%, this will give the firm a value of $509,090, this is above the asking price. Therefore, while the firm has a low level of assets, it is generating income. The issue that would hold back a purchase would be the current decline in profit and concern for the reason this is declining and Gino's reason for sale. If there are no other negative factors then $200,000 may be a fair price.
Dividend discount model calculator can be found at http://www.moneychimp.com/articles/valuation/dcf.htm
Customer Value Funnel Approach. The reference appends four sources in APA format.
The "customer value funnel approach" (p. 153) is a highly significant implement for clearly comprehending and evaluating business mechanisms and other marketing-related critical situations. esides a priceless strategic marketing framework, this approach focuses on the satisfaction of customers, the main marketing target of various giants in the business industry to reap the benefits of high productivity and massive volume due to broad clientele. As Stanley Slater states "As marketers, we should be committed to the proposition that the creation of customer value must be the reason for the firm's existence and certainly for its success" (p. 153).
Hence for effective business practices and performance, customer values play a vital role and therefore all focal organizations must take into consideration all the four levels of the Customer Value Funnel approach just like Southwest Airline did when it began…
Designing and Delivering Superior Customer Value. Part 2: Customer Value Cases. Case 17: Southwest Airlines- Value Added Customers. Pages: 153- 311
American Heritage Dictionary, Fourth Edition
Spend Less = Make More. That's The Marketing Equation Driven by ADP's CRM Solutions (2001). Retrieved February 11, 2003 at http://www.adpcrm.com/pages2/cust.html
Price Optimization System (2002). Retrieved February 11, 2003 at http://www.nationalanalysts.com/marketing/pricing-strategy-research/price-optimization.asp
However, EVA is neither as perfect as claimed by its advocates, nor is it the only performance measure that suggests a path to a superior stock return" (emphasis added) (p. 319).
More importantly, though, while the economic value added measurement approach to financial performance may not be without its detractors, the scholarly literature is consistent in emphasizing the need for such initiatives for companies to remain competitive in an increasingly globalized marketplace today. For instance, in his recent essay, "Profit-Increasing Strategies," Tracy (2006) reports that there are a number of ways for most companies to add value to their product or service. "There are many strategies for generating sales, profitability and wealth in every industry," he advises. "Your ability as an entrepreneur to create a profitable business where no business existed before is the key to your success. In every market, it's usually true that 20% of the businesses earn…
Brewer, P.C., Chandra, G., & Hock, C.A. (1999). Economic value added (EVA): Its uses and limitations. SAM Advanced Management Journal, 64(2), 4.
Chen, S., & Dodd, J.L. (1997). Economic value added (EVA Super TM): An empirical examination of a new corporate performance measure. Journal of Managerial Issues, 9(3), 318.
Fletcher, H.D., & Smith, D.B. (2004). Managing for value: Developing a performance measurement system integrating economic value added and the balanced scorecard in trategic planning. Journal of Business Strategies, 21(1), 1.
Mcmenamin, J. (1999). Management: An introduction. London: Routledge.
Economic Value Added (EVA) Accounting Practice
Although Economic Value Added (EVA) is not a new concept in economics and financial theory and is based on the 19th century concept of "economic profit," it has only been widely adopted recently by business firms as an accounting practice. In this paper we shall describe what EVA is, and look at its pros and cons from the point-of-view of the company adopting the practice and the investors. We shall also discuss how EVA differs from some other emerging accounting practices and the major issues relating to EVA as compared to other commonly used accounting principles. Finally, the possible problems and opportunities that a company adopting EVA principles can face shall be examined.
What is Economic Value Added (EVA)?
Economic Value Added (EVA) is the after-tax cash flow generated by a business minus the cost of the capital it has invested to generate that…
Keen, Peter. (1999). "Economic Value Added.(EVA)" Every Manager's Guide to Business Processes. Retrieved on April 20, 2003 at http://www.peterkeen.com/emgbp007.htm kel inen, Esa. (1998). "Economic Value Added as a Management Tool." Retrieved on April 20, 2003 at http://www.evanomics.com/
Shand, Dawne. (October 30, 2000). "Economic Value Added." COMPUTERWORLD. Retrieved on April 20, 2003 at http://www.computerworld.com/managementtopics/management/itspending/story/0,10801,53001,00.html
Stewart, Bennet (1999) "What is EVA?" Stern Stewart & Co. Web site. Retrieved on April 20, 2003 at http://www.sternstewart.com/evaabout/whatis.php
This cost reflects both the time value of money and compensation for risk -- the more risk associated with a firm, the greater the firm's cost of capital.
Identify the relevant macro-environmental factors (level 1) in the case study. What impact do these factors have on the focal organization?
To the extent which the customer base and potential customer base of Time Insurance Company (Time) share the concerns of the global business community, these shared concerns serve as a template for appropriate professional behavior. These not only include matters that might (when improperly handled) prompt litigation against Time, but also include factors such as social accountability. Macro-environmental factors, however, are sometimes hard to determine in that they often fail to reflect a consensus. These must be seen as a polyglot of different concerns, some of which pertain to the company while others do not. The "value" system reviewed in the text is a measure of total value, and the market analyst must be careful to examine the total effect of changes. For instance, if prescribed staff…
market values" UK Listed Companies evaluate companies Investor atios Profitability atios. With reference statement: require critically appraise importance market balance sheet UK listed companies critical assess a relevant range investor profitability ratios measuring performance.
Market value and balance sheet value
A British firm listed on the market is generally traded at its market value, regardless of its balance sheet value. At a simplistic level, the balance sheet value represents the value of the firm as it is computed within the organization and in terms of the company's resources, revenues and other internal values. The market value on the other hand is the value of the company as it is assigned by the multitude of players in the market, and which is often computed based on elements intrinsic to the market, such as profitability of the company, risks and so on.
At a more specific level, the two concepts…
2010, Investor ratios, Bized, http://www.bized.co.uk/compfact/ratios/investor2.htm last accessed on December 15, 2010
2010, Profitability ratios, Morningstar, http://news.morningstar.com/classroom2/course.asp?docId=145093&page=6&CN=COM last accessed on December 15, 2010
2010, Investopedia, http://www.investopedia.com last accessed on December 15, 2010
Investment tips: what are key investment ratios? Essortment, http://www.essortment.com/career/keyinvestmentr_sape.htm last accessed on December 15, 2010
Valuing Common Equity
Comparison of Lowes and The Home Depot
There are different methods that firms and investors can use to value the common equity that a corporation holds. The different methods all have strengths and weaknesses in different circumstances and it is important to understand these factors in any evaluation. For example, the company's future income stream will ultimately determine the company's fundamental value; however these calculations are not always what determines a firm's market price. Although there are many factors that determine the market price, the company's net present value (NPV) of future revenue streams can be useful to both investors and internal executives relative to managerial accounting. A company's NPV can be used to compare different direct investment opportunities as well as calculating an average cost of capital to serve as an investment baseline; whereas indirect valuation are more subject and often lie on whether investors believe…
Ferris, K.; Petit, B. (2013, August 5). Valuation for Mergers and Acquistions: An Overview. Retrieved from Financial Times: http://www.ftpress.com/articles/article.aspx?p=2109325&seqNum=6
Investopedia. (N.d.). Complete Guide to Corporate Finance. Retrieved from Investopedia: http://www.investopedia.com /walkthrough/corporate-finance/3/stock-valuation/common-stock-valuation.aspx
van Doom, P. (2015, August 20). Opinion: Home Depot vs. Lowe's - which is the winner? Retrieved from Market Watch: http://www.marketwatch.com/story/home-depot-vs.-lowes-which-is-the-winner-2015-08-19
Down? The Value of the Dollar
International Currency Exchanges
Current Trends and Initiatives
Impact of the Euro on Dollar Valuation
Analysis of Current Trends and Initiatives on Dollar Valuation in the Future
Up or Down? The Value of the Dollar: A Historical Analysis of the Valuation of the U.S. Dollar
According to Michael Artis, Elizabeth Hennessy, and Axel eber (2000), capital losses can be caused by differential changes in the value of assets and liabilities, primarily exchange rate changes; these changes affect the value of a central bank's foreign exchange reserves. To date, exchange rate changes have only been a major problem for national central banks with very large foreign exchange reserves (i.e., Portugal); however, it might also become a problem for the European Central Bank in the future, whose balance sheet on the asset side will be dominated by the approximately 40 billion euro in foreign exchange reserves it…
Arthurs, Harry. (1996). "Globalization and Its Discontents." Journal of Business
Administration and Policy Analysis, 24-26, 132.
Artis, Michael, Elizabeth Hennessy and Axel Weber (Eds.). The Euro: A Challenge and Opportunity for Financial Markets. London: Routledge, 2000.
Charrette, Susan and Juann Hung. (1997). "The Looming U.S. External Debt. How Serious is
462). It is small wonder that some insurance companies understand the risks of insuring lives and the accompanying cash surrender values of a life insurance policy.
In a prime example of how some insurance companies were caught up in the evaluation game is the case of AIG, the company that forgot that the value of its stock, or the value of the company was based primarily on a fair value, that might not have been fair at all. The harbinger of disaster was when the financial marketplace placed a fair value on AIG that was far below what the company believed it should be. This scarcity could be one of the primary reasons why the financial industries around the world are in the torrents they are currently swimming.
Some of the literature available touched on the primary causes of the current financial crisis before it took place. One recent study…
Bacinello, a.R.; (2003) Fair valuation of a guaranteed life insurance participating contract embedding a surrender option, the Journal of Risk and Insurance, Vol. 70, No. 3, pp. 461-487
Cho, H.; Shilling, J.D.; (2007) Valuing retail shopping center lease contracts, Real Estate Economics, Vol. 35, No. 4, pp. 623-649
Gang-Zhi, F.; Tien, F.S.; Seow, E.O.; Simans, C.F.; (2004) Governance and optimal financing for asset-backed securitization, Journal of Property Investment and Finance, Vol. 22, Issue 4/5, pg. 414
Gilbert, R.J.; Klemperer, P.; (2000) an equilibrium theory of rationing, the Rand Journal of Economics, Vol. 31, No. 1, pp. 1-21
Spanglish is a combination of Spanish and English, with each of these two languages having more or less of an influence on the final product depending on the circumstances. The speech of Spanghlish users involves them bringing together the two languages and creating a dialect that is not native to the country they inhabit. Spanglish is widely used in Hispanic communities in North America, as they prefer it as an intermediary dialect assisting them to connect with the English-speaking community.
Living in two cultures can have a strong impact on a person, as he or she gradually comes to switch back and forth between cultural values promoted in each of these respective environments. This is perfectly demonstrated by individuals speaking Spanglish, taking into account that they need to concentrate on adopting attitudes that enable them to improve their relationship to both English and Spanish-speaking communities.
Although Spanish plays an integral…
Betz, Regina M., "Chicana "Belonging" in Sandra Cisneros' The House on Mango Street," Retrieved November 23, 2013, from http://rmmla.innoved.org/ereview/SI2012/Betz.pdf
Canas, Alberto, "Spanglish: The Third Way," Retrieved November 23, 2013, from http://www.hokuriku-u.ac.jp/jimu/kiyo/kiyo25/209.pdf
Cisneros, Sandra, "The House on Mango Street," (Bloomsbury Publishing, 2004)
Johnston, Bethany, "Code Switching as Spanglish," (GRIN Verlag, 14 Jan 2011)
NPV vs. I
Discount rate 0%, NPV =$670,000
Discount rate 2%, NPV=$614,400
Discount rate 6%, NPV=$514,820
Discount rate 11% NPV= $409,000
Capital Cost 5%, Modified I= 45.6%
Upon plotting these points on a chart an obvious relationship is modeled. The lower the discount rate the higher the NPV appears to manifest. The curve crosses the x axis at a discount rate of .03%.
ate at 1%, NPV=$65,358
ate at 4%, NPV= $7,593
ate at 10%, NPV= -$91,776
ate at 18%, NPV= -$197,871
Discount rate at X axis = 2.8%
Anthes (2003) presented some very useful descriptions of the terms net present value (NPV) and internal rate of return (I). The article suggested that the NPV and the internal rate of return I is defined as two faces of the same coin and both reflect on the anticipated performance of a firm or business over a particular period of time.…
Anthes, G. (2003). ROI Guide: Internal Rate of Return. Computerworld, 17 Feb 2003.
CFA Study. Net Present Value Vs. Internal rate of return. Viewed on 11 July 2013. Retrieved from http://cfa-studynotes.blogspot.com/2008/10/net-present-value-vs.-internal-rate-of.html
Assessment of National Guard Armory Proposal from a Financial Perspective
The State of Massachusetts would like to replace a National Guard armory, to assess whether or not replacement is a viable strategy it is essential to assess the costs against the alterative of retaining the existing the current armory. There are several different methods of assessment which may be used; one of the most popular is the net present value (NPV) (Boehlje & Ehmke, 2013). This takes the cost of a future project and the gains or costs, and discounts them into today's value. By discounting the savings (or cash flows) on a compound basis the time value of money is incorporated into an assessment, so different projects may be assessed and compared on a like for like basis (Berk, DeMarzo, & Harford, 2011).
The aim of this paper is to compare the potential costs associated with building a…
Carter, M, (2014, Feb 22), Why Whole Foods Market May Have a Big Problem, Motley Fool, accessed 22nd Feb at http://www.fool.com/investing/general/2014/02/22/why-whole-foods-market-may-have-a-big-problem.aspx
Lambert, T, A, (2008), Four Lessons from the Whole Foods Case, CATO Institute, accessed 22nd Feb at http://object.cato.org/sites/cato.org/files/serials/files/regulation/2008/2/v31n1-4.pdf
MacKey, J; Robb, W, (2013). Letter to Stakeholders, accessed 22nd Feb 2014 at http://www.wholefoodsmarket.com/sites/default/files/media/Global/Company%20Info/PDFs/WFM-2013-Letter-to-Stakeholders.pdf
Meador, Don; Britton, Mike; Phillips, Paige; Howery, Andrew, (2007), Case Analysis -- Whole Foods Market, accessed 22nd Feb 2014 at http://pnphillip.asp.radford.edu/whole%20Foods%20Case.pdf
Long-Term Financial Planning
FedEx Corporation was established in 1971 and the company has four distinct business segments that include FedEx Express, FedEx Ground, FedEx Office and FedEx Freight. Over the years, the company has obtained 6-year of CAG (compounded annual growth of 5%). However, the company is likely to obtain similar CAG of 5.9% over the next 8 years based on current economic environment. (FedEx Corporation .2010.
The WACC (weighted average cost of capital) is the average interest rate that a company should pay in order to secure a project. Moreover, WACC is the average rate of return that a company must earn from its current assets to satisfy investors, shareholders and creditors. Since FedEx Corporation is always trying to create value for shareholders, the paper calculates the WACC of the FedEx to evaluate the company ability to generate returns from its assets.
Estimation of WACC of the…
FedEx Corporation (2010. Annual Report.USA.
Guillermo Capital Budgeting
Guillermo is faced with a difficult operating environment. Competition has intensified, and this is driving down his margins. At the same time, labor costs are rising. This is putting a squeeze on Guillermo. At present, it does not look like he can compete head to head against his new rival, as that rival is using a technological competitive advantage to outcompete Guillermo. As a result, Guillermo is now faced with three different options for revitalizing his business. The first is to become a broker for a high-tech competitor based in Norway, a move that would take him out of the manufacturing business. The second is that he could add value to his existing product perhaps allowing him to improve his margins. Guillermo's third option is to adopt the Norwegian company's technology, as this would lower his cost of production significantly, restoring some of his net margin.
Accounting for Management. (2011). Payback period method for capital budgeting decisions. Accounting for Management. Retrieved February 11, 2012 from http://www.accountingformanagement.com/pay_back_method_of_capital_budgeting_decisions.htm
Baker, S. (2000). Perils of the internal rate of return. University of South Carolina. Retrieved February 11, 2012 from http://hspm.sph.sc.edu/courses/econ/invest/invest.html
Investopedia. (2012). Net present value -- NPV. Investopedia. Retrieved February 11, 2012 from
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 either automate his manufacturing process with a very high initial cost for equipment but allowing him to continue as a furniture manufacturer, he can shift to distribution for foreign competitors with cheaper products seeking entry into the North American market, or he can begin manufacturing and selling his patented flame retardant instead. Each choice will require an initial outlay of capital and will also have varying returns over the years. Assessing these options from a budgetary standpoint requires the…
Case. (n.d.). Guillermo Furniture Scenario.
Cross, V. (2012). Techniques in capital budgeting decisions. Accessed 16 October 2012.
Guin, L. (2011). Capital budgeting techniques. Accessed 16 October 2012.
investment in a rental/real estate property. There is a one-time purchase of $10,000 in land that can subsequently be rented for a yearly $3,500 rent for a period of several years. At the end of the rental period, the investor aims to sell the land for a certain price. The longer the period of the rental is, in number of years, the more the land will degrade and, as a consequence, will be valued at a lower sum at the end of the entire period of time.
As a consequence, the several scenarios that will be taken into consideration will look at a comparison between longer years of rental vs. lower price for the final sale of the land or a shorter period for the rental period, but a higher price for the final sale at the end of the rental period.
This paper will look at three different scenarios…
1. Halpern, Paul et. Al, (1998). Managerial Finance. Dryden 2. Project Economics and Decision Analysis, Volume I: Deterministic Models, M.A.Main
3. Hazen, G.B., (2003). A new perspective on multiple internal rates of return. The Engineering Economist 48(2),
Financial Analysis of Bestwish Limited
Bestwish Limited produces extensive range of quality products such as gift dressing, greetings cards, and plush merchandise of more than 50,000 stocks. The production of different categories of products involve between 2 and 15 processes. The company produces standardized products and custom designed products ordered from customers on contract basis. However, Bestwish Limited is facing challenges to control the costs because of varying production process, reliance on indirect costs and large number of stock keeping units.
Bestwish Limited has just closed the 2010 fiscal year account and the company is finalizing the 2011 budget. Bestwish intends to analyze the 2010 financial statement to present the accurate picture of the company financial performances.
Objective of this report is to analyze 2010 financial statements to assess the viability of Bestwish Limited.
Audit Committee of the Board
Subject: Financial statement Analysis
Drury, C. (2009). Management Accounting for Business, 4th Edition (Cengage Learning EMEA, ) ISBN 1408017717.
Harris, R. And Sollis, R. (2003).Applied Time Series Modelling and Forecasting (John Wiley and Sons) ISBN 0470844434
Glynn, J. Perrin, J. Murphy, M. And Abraham, A. (2003).Accounting for Managers, 3rd Edition.(Thomson Learning) ISBN 186152904X
The Times 100, (2012). Financial statements and reporting A Cadbury Schweppes case study. The Times 100 Business Case Studies.
There are several criteria by which the company can establish acceptability for the eCube system of EM that is available from Fresenius. The first stakeholder group consists of the patients, who will benefit from the enhanced functionality that comes from the eCube system, in particular the superior health outcomes that come from having accurate medical histories available to physicians and other practitioners while they are working with the patient. Management must strike a balance between business objectives and patient outcomes, and therefore there are multiple different acceptability measures that are possible, both based on profit and patient outcomes. Management will also want to know that the system is relatively easy to install, that there is training available from the vendor for the staff, and that the vendor will deliver full support of the system if there are any problems.
Another stakeholder group consists of the owners/shareholders of the health…
Jena, A., Seabury, S., Lakdawalla, D. & Chandra, A. (2011). Malpractice risk according to physician specialty. New England Journal of Medicine. Vol. 365 (7) 629-636.
Kalathil, R. (2011). Data management: New products: eCube combines clinical and billing applications. Neprhology News & Issues. Retrieved November 6, 2013 from http://www.nephrologynews.com/articles/data-management-new-products-ecube-combines-clinical-and-billing-applications
Self, D. & Schraeder, M. (2009). Enhancing the success of organizational change: Matching readiness strategies with sources of resistance. Leadership and Organizational Development Journal. Vol. 30 (2) 167-182.
Question 1.a) Bond ratings encompass a wide range of elements related to the credit risk of the firm. Moody's notes that bond ratings include elements of default probability, loss severity, "financial strength" and "transition risk" (Cantor & Fons, 1999). The authors note that within the same sector, bonds of the same rating tend to be comparable both with respect to overall credit quality and specific credit quality characteristics. Over different segments of the bond market, this is not necessarily the case. Bond ratings tend to take in factors like the balance sheet strength of the firm, as well as the expected loss in the event of a default. Thus, the type of assets that the firm holds is an important characteristic. The transition risk reflects the likelihood that the firm will experience outright default without transitioning down through the different risk categories. Firms that are almost assuredly going to…
Cantor, R. & Fons, J. (1999). Rating methodology: The evolving meaning of Moody's bond ratings. Moody's. Retrieved April 27, 2012 from http://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/2000400000300541.pdf?frameOfRef=corporate
Investopedia. (2012). Net present value. Investopedia. Retrieved April 27, 2012 from
To find out the stock's value with the information provided, the Gordon Growth Model would be used. The Gordon Growth Model is used to determine the price of a stock if the dividend, dividend growth rate and discount rate are all known. The underlying assumption behind the Gordon Growth Model is that the stock price is based on the expected future dividends -- investors are only investing for the known future cash flows. As a result, only the dividend and the discount rate are taken into account, along with the expected future growth rate of the dividend. Capital gains are not taken into account in the Gordon Growth Model.
The formula for the Gordon Growth Model is as follows:
Source: Investopedia (2011)
Thus, $2 / (.15-.05) = P
P = $
The stock's value if the riskiness of the stock changes would be calculated with the same formula,…
Amadeo, K. (2012). Inverted yield curve. About.com. Retrieved February 4, 2012 from http://useconomy.about.com/od/glossary/g/Inverted_yield.htm
Baker, S. (2009). Perils of the internal rate of return. Economics Interactive Tutorial. Retrieved February 4, 2012 from http://hspm.sph.sc.edu/courses/econ/invest/invest.html
Chmielowiec, M. & Granger, B. (2011). Cost of risk: Show me the money. U.S. Captive. Retrieved February 4, 2012 from http://www.pointright.com/pdf/PR_Article_2011_Cost_of_Risk_Show_Me_The_Money.pdf
Investopedia. (2011). Gordon growth model. Investopedia. Retrieved February 4, 2012 from
pay back period" is the length of time that is required to cover the cost of an investment. I would use this in order to make a good financial decision.
The calculation that I would do is as follows:
For instance, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or, in other words, $20 per 5 years.
The better investment is the one that has the shorter pay back period.(Investopeida)
Another tool that I would use to measure the time value of money to assess long-term projects is Net present value (NPV). Businesses use it to measure the value of a time series of cash flows both incoming and outgoing. For instance, when all types of cash flows are incoming (such as bonds or coupons), and the only cash outflow is the purchase price, the NPV…
About.com Debt and Equity Financing
Benzinga. Com Understanding Stocks: The Concept of Betahttp://www.benzinga.com/general/psychology/12/01/2300328/understanding-stocks-the-concept-of-beta
Cuckke.com. Systematic risks and unsystematic risks.
Its three-year payback is $16,000. The three-year payback for project B. is -$2,000, so that project should not be accepted.
5) The most commonly used capital budgeting procedures are the net present value (NPV) and the internal rate of return (IRR). After this comes payback period, although that is significantly less popular on account of its inability to account for the time value of money.
6) Although net present value (NPV) is the best method of capital budgeting in practice, there are many reasons why is not the only method used. For example, net present value is incomplete. The net present value method is strong, but it only accounts of time value of money and it is heavily reliant on estimates and assumptions. hen put together, this reveals the inherent weaknesses of the NPV system. The method is strong for that which it does know, but is largely weak for…
Jahnke, H. & Simons, D. (2008). A rationale for the payback criterion. Universitat Mannheim.
Real Options Analysis
Companies resort to capital budgeting in the process of taking decisions with regard to making long-term investments. The projects involving capital budgeting are chosen by the companies in terms of expected generation of cash flows. Since profitability is the main criterion for long-term investments of the companies the strategic decisions with regard to the long-term investments involves a cost-benefit analysis in terms of cost of investments and expected generation of cash flows over the period of time. Emphasis is being laid on the concepts of Net Present Value and Internal Rate of Return etc. To assess the benefits of long-term investments against the cost of capital invested. The cost of capital of a firm signifies towards the cost of obtaining of capital by the firm that is used for long-term investments. Generally the firms define economic profit as the operating profit excluding the tax and cost of…
Dynamic strategic planning Evaluation of Real options" Retrieved at http://msl1.mit.edu/mib/dsp/curricula.mit.edu/~dsplan/Docs/Sessions/S70/s70.pdf. Accessed on 19 May, 2004
Eckersley, Peter. Regional Economist, Bunbury. "Budgeting and decision-making techniques" Retrieved at http://agspsrv34.agric.wa.gov.au/agency/pubns/farmnote/1993/F06393.htm. Accessed on 19 May, 2004
Net Present Value and Other Investment Criteria" Retrieved at http://www.webster.edu/~charngil/chapter%208.pdf . Accessed on 19 May, 2004
Phelan, Steven E. "The Role of Strategic Thinking in the Analysis of Hard Investment Evaluation Problems" Retrieved at http://www.aom.pace.edu/bps/Papers/ifsam.html. Accessed on 19 May, 2004
Often, the decision will come from a set of alternatives in which there is at least some mutual exclusivity. Thus, the decision-making criteria need to take into account the size of the investment in addition to its payoff. The internal rate of return is useful in helping to identify those investment opportunities that have the highest percentage payoff, but if a small investment opportunity is mutually exclusive with a larger opportunity that is more lucrative in real dollars but less lucrative on a percentage basis, the company may choose the smaller alternative. Under this scenario, the profit of the company would not be maximized.
Because net present value accounts not only for the percentage return but also the raw dollar figures involved, it provides management with more useful information upon which to base their capital budgeting decisions. Internal rate of return is a strong method, but it is limited because…
Price of bond= 0.385543*1000 +6.144567*100= $385.54.64+$614.45
Price of bond= $1,000
So, price of bond B. is $1,000 b. For market interest rate equal to 12%:
Price for bond a:
Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 12%
10% $1,000 Annual 20-20-12.00% annual 12.00% 20-12.00%
Now we need to calculate PVIF and PVIFA.
For calculation of PVIFA (i, n) and PVIF I is equal to 20 periods and n=12%
PVIFA= (1- 1/(1+.12)^20)/.12
Price of bond= 0.103667*1000+7.469444*100=$851
Price of bond a = $851
Price of bond B:
Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 12%…
49% which shows that the company is able to earn $22 by investing $100 which is certainly a sign of financial healthy company. After analyzing the profitability ratio, let's now examine the efficiency ratios of the company.
Efficiency atio Analysis
Efficiency ratios (E) are the ratios which used to assess the effectiveness of a company. The specific rations come under the ambit of E are eturn on Asset (OA) and eturn on Equity (OE) (Daniel, 1992). Let's examine both the ratios.
eturn on Assets (OA) Analysis
An indicator of how profitable a company is relative to its total assets. OA gives an idea as to how helpful management is at using its assets to produce profit (Groves & Edward, 2004). Calculated by dividing a company's annual wages by its total assets, OA is displayed as a percentage. The computed OA figure and its graph is mentioned below,
Anthony, G & Cornyn, D (1982), Company Analysis, Pearson Group Publications
Alexander, J (2007), Value Creation and Analysis, Pearson Group Publications
Archand, T (2003), Strategic Company Analysis, John Wiley & Sons Professional Publications
David, P & Hussey, E (2001), Company Analysis: Determining Strategic Capability, McGraw Hill Publications
Billy Bob bought 100 shares of Stock in Ben's Barbeque, Inc. For $37.50 per share. He sold them in January, 2004 for a total of $9,715.02. What is Billy Bob's annual rate of return?
Since Billy Bob held the investment for 54 years, the annual rate of return is best calculated using the compound rate of return formula:
(Future Value / Present Value) ^ (1 / n) -- 1, where n = number of years.
Filling the data into the above formula:
Billy Bob's return on his investment in Ben's Barbeque is 1.78% per year.
Yellow Fruit Company's bonds are currently selling for $1,157.75 per $1,000 par-value bond. The bonds have a 10% coupon rate and will mature in 10 years. What is the approximate yield to maturity of the bonds?
Using the following formula:
c (1 + r)-1 + c (1 + r)-2 + . . . +…
Block, S. And Hirt, G. (2005). Foundations of Financial Management, Eleventh Edition. New York, NY: McGraw-Hill Irwin.
Mayo, H. (1982). Finance. New York, NY: CBS College Publishing.
Global Financial Strategy
Critical assessment of the proposal to raise capital locally rather than in the UK
In the analysis of the proposal of raising capital locally rather than in the UK, it is essential to consider four critical aspects: costs, risks, benefits/advantages, and limitations/disadvantages. In the presentation of this critical assessment, the focus will be on the four factors or aspect in order to offer reliable analysis of the situation.
In the process of raising capital locally rather than in the UK, the organization must incur several costs. One of the essential costs is the professional cost. This refers to the amount of money or financial resources paid to the legal advisors, auditors, and reporting accountants in order to execute the process of raising the capital effectively and appropriately. Another important aspect of cost is the trading cost. These are direct costs including the brokerage commissions and financial…
Burnham, P 2010, 'Class, Capital and Crisis: A Return to Fundamentals', Political Studies Review, 8, 1, pp. 27-39,
Carvalhal, A, & Camara Leal, R 2013, 'The World Financial Crisis and the International Financing of Brazilian Companies', Brazilian Administration Review (BAR), 10, 1, pp. 18-39,
'Chad' 2013, Columbia Electronic Encyclopedia, 6Th Edition, pp. 1-3,
Chana Kok, T, & Yap Voon, C 2011, 'Risk Factors of Commercial Banks in Malaysia', Journal Of Modern Accounting & Auditing, 7, 6, pp. 578-587,
Guillermo Furniture Store is facing a challenging operating environment. He is facing strong new competition that is threatening the company's margins and market share. The competitor is able to do this by utilizing state-of-the-art technology that allows the company to undercut Guillermo considerably on price, with a fairly low perception of quality drop-off in the eyes of the consumer. The second environmental challenge that Guillermo faces is that the cost of labor has increased significantly in recent years. The company's low cost of labor had been a source of competitive advantage for a long period of time. With these two changes in the environment, Guillermo Furniture is no longer competitive. The company needs to examine its options.
There are a number of options that Guillermo is analyzing in order to keep the company alive. It has generally been determined that the company cannot survive for much longer using the current…
Guillermo Furniture Store is facing a difficult operating environment. The cost of labor -- a key input -- is increasing rapidly. The company is facing intense competition from a foreign competitor that has the ability to undercut Guillermo's low-end lines with better-quality goods. In order to save his business, Guillermo has sought out three different alternatives and is subjecting these alternatives to financial analysis. The results of the financial analysis will be combined with a strategic analysis in order to determine the best way forward for Guillermo.
eighted Average Cost of Capital.
Since Guillermo is going to be using a net present value (NPV) analysis to help make his decision, the first step in this analysis is to determine the company's cost of capital. The three projects are substantially different from one another, and because they all have a different risk profile there is an argument to be made that…
The basic premise of IRR is that if the IRR is higher than the discount rate, the project will be profitable over its life, whereas if the IRR is lower, the project will not be profitable. The IRR calculation is normally done in Excel, but can be rendered as
The IRR for the patent coating option is 6.9%; for the automation technology it is 64.7%; for the brokerage option it is 11%.
The net present value (NPV) discounts the cash flows using the discount rate derived from the weighted-average cost of capital. This calculation utilizes all of the cash flows that are specific to the decision at hand, including the initial outlay, salvage value and all cash flows beyond the payback period. This makes the NPV the most complete of the capital budgeting techniques available to Guillermo. Although normally this calculation is completed in Excel, the formula is as follows:…
Dibsa should turn towards the market-based pricing strategy, which sees the implementation of competitive prices for the 3-in-1 Lawnmower. The selection of this combination of strategies would generate several impacts upon the company, but most of them would be obvious at product lifecycle level. In this order of ideas:
The sales revenues would be significantly high throughout the first six months and they would allow the company to cover for the large costs incurred in the manufacturing of the product as well as register profits; they would however decrease with the implementation of the market pricing strategy and the 3-in-1 Lawnmower would metamorphose from a star product into a cash cow
The costs incurred in the manufacturing of the new lawnmower have already begun to decrease and will continue to do so; the actual impact of the pricing strategy is limited, with the specification however that these costs will not…
Berman, K., Knight, J., Case, J., 2006, Financial Intelligence: A Manager's Guide to Knowing what the Numbers Really Mean, Harvard Business Press
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There are several benefits that a global consumer electronic firm could derive from inter-project learning.
First, inter-project learning allows firm to enhance project completeness. Prencipe, & Tell (2001) argue that inter-project learning allows firms to execute a project in a best method. In the present competitive market environment, project is the key to the dynamic competitive capabilities. Typically, accumulation of knowledge builds project competencies, which could enhances market performances of a global consumer electronic firm. Experience has revealed that project-based firm has been able to record high profit in the market environment. ( Brady, and Davies, 2004).Through inter-project learning, a global consumer electronic firm will be able to better estimate the project costs and this will enhance ability to deliver the project with success. Moreover, the inter-project learning will enable the company to estimate the project risks efficiently. By better evaluating the project risks, the project manager will be…
Anbari, F.T., Carayannis, E.G. And Voetsch, R.J. (2008) Post-project reviews as a key project management competence, Technovation, Vol. 28, pp.633-643.
Brady, T. And Davies, a. (2004) Building of the Project Capabilities: From Exploratory to Exploitative Learning, Organization Studies, Vol.25, No.9, pp.1601-1621.
Prencipe, a. & Tell, F. (2001). Processes and outcomes Inter-project learning: knowledge codification in project-based firms. Research Policy. 30: 1373 -- 1394
The success rates of this venture are increased as investors are willing to risk their money in the hope of increased gains. Otherwise put, shareholders "can accept downside risks because they fully share the upside as well" (Dynamic Equity, 2002). egardless of the sources used in contracting the necessary money, the organization would still have to retrieve a minimum of $40 million revenues during the first year in order to be profitable.
7. Exchange ate isk
Some managers at the Wilson Company argued that the organization should contract its loans in enminbi, or the Chinese currency. The measure would, according to them, help the company protect itself against currency exchange risks. Considering that the company comes to disregard this suggestion, the situation would present itself as follows:
the exchange rate is of one M to 0.2 USD, meaning basically that a United States dollar can be purchased for 5 enminbis…
Fabozzi, F.J., Peterson, P.P., 2003, Financial Management and Analysis, 2nd Edition, John Wiley and Sons, ISBN: 0471234842
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Walesh, S.G., 2003, Managing and Leading: 52 Lessons Learned for Engineers, ASCE Publications, ISBN 0784406758
This will also show the degree to which the project is vulnerable to potential changes on the market that would influence its main figures, including the volume of sales.
Another useful tool that can be used is a simulation. A simulation would allows us, in this particular analysis, to change some of the variables in a mathematical model that we would create and analyze the consequences of those changes. The sensitivity analysis has one important restriction in that it only allows one variable to be changed. With the simulation, this is no longer the case. At the same time, it is important to perform a simulation because one would be able to understand how the other elements in the mathematical model are likely to fluctuate as some of the variables change.
1. Calculating the Net Investment (NINV) or Initial Outlay (IO). On the Internet at http://uwf.edu/rconstand/geb5874/T9-Capud/T9-CapudP02.htm. Last retrieved on…
1. Calculating the Net Investment (NINV) or Initial Outlay (IO). On the Internet at http://uwf.edu/rconstand/geb5874/T9-CapBud/T9-CapBudP02.htm . Last retrieved on July 22, 2011
2. What is Terminal Cash Flows in Capital Budgeting? October 2008. On the Internet at http://basiccollegeaccounting.com/what-is-terminal-cash-flows-in-capital-budgeting-analysis/ . Last retrieved on July 22, 2011
3. On the Internet at http://classweb.gmu.edu/chylton/tecm615/tecm615ppt/session7riskanalysis.ppt#267,12,What is sensitivity analysis?. Last retrieved on July 25, 2011
The weighted average cost of capital is as follows:
In a net present value analysis, the cost of capital is often used as the discount rate. A net present value analysis seeks to reflect the value today of cash flows in the future. In order to do that, the future cash flows must be discounted back to present day dollars. There are a number of different ways to obtain the discount rate. The company might utilize a hurdle rate that they choose given their own reasons. Another approach is to use the rate associated with the financing that the firm wants to use -- for example if it intends to issue a bond it might use that bond rate as the hurdle rate. However, the weighted average cost of capital (ACC) is one of the most common.
The ACC is often adjusted to suit the risk profile of…
Investopedia. (2012). Weighted average cost of capital. Investopedia. Retrieved November 16, 2012 from
Capital Accounting and Budgeting Questions
When a firm has different potential projects or investments, they will want to assess their options to ensure they make the best choice. However, comparing different types of projects or investments can be difficult, especially if the projects have different terms to maturity and/or different risk profiles. A useful tool is that of net present value (NV). Net present value allows different types of project to be compared on a like for like basis.
The net present value calculation takes all of the forecast future net cash flows of a project (the revenue less all the costs), and then discounts them into today's value. The discounting allows the firm to assess what the value of the future cash flows will be in today's money. The rate of discount applied will usually be the cost of capital for the firm, but where there is…
Political risk manifest in a number of ways, they may be in the policies and laws that a government enacts, political instability and even aspects such as competition regulations. These will all impact on the potential level of risk associated with an investment. When undertaking capital budgeting, for a project to be viable, where there is an additional risk it is necessary for there to be a risk premium to justify taking that additional risk. The introduction of different types of policies, regulation or laws by government, may impact on the overall value of an investment, and in some cases may be severely detrimental. For example, in some countries there may be a risk of nationalization which the company may lose a significant amount of its investment (Mintzberg et al., 2008). Likewise, the amount of value in investment may create, especially if it is targeting markets, will be impacted by the competitive conditions, which in turn influenced significantly by government policies and attitudes.
Transfer pricing refers to pricing of internal transactions, for example when goods are sold by one company to another company in the same group, or possibly transfers between divisions. When undertaking capital budgeting, the potential benefits and risks associated with transfer pricing will need to be considered. A project may be viable due to the economies which can be gained from in-house, or in group supply. Likewise, the potential benefits may also be limited in terms of national regulation and the way in which transfer pricing is controlled. Transfer pricing will impact on the costs and potential profits that are assessed when examining potential investments or projects. The security of the
The higher the quality of the information in the first place, the more accurate your NPV calculations will be.
Another way to deal with uncertainty is to make conservative estimates. A project that only has a positive NPV under ideal scenarios is not generally a worthwhile project. The scenarios upon which the decision is made should be less-than-ideal case scenarios. Conservative estimates of future cash flows should be used, as should a high hurdle rate. This should be related to the market, not simply be plucked from the air, or generated strictly on the basis of internal considerations. By planning for a poor scenario, only the projects with the highest likelihood of success will be undertaken. Therefore, if adverse conditions occur, the project still has a good chance to deliver a positive net present value.
In addition, the additional costs associated with adverse conditions should be considered and built into…
No author. (1997). The Top 10 Things to Consider When Making a Capital Budgeting or Investment Decision. Coachville. Retrieved July 8, 2008 at http://www.topten.org/content/tt.AI19.htm
McCracken, Mark. (2005). Capital Budgeting. Teach Me Finance. Retrieved July 8, 2008 at http://www.teachmefinance.com/capitalbudgeting.html
a) When making capital budgeting decisions, Caledonia should focus on cash flows rather than accounting profits. The argument in favor of cash flows is simple -- cash flows are what drive company value, more so than economic profit. Profit can be distorted by a number of considerations that do not impact on cash flows. For example, depreciation expense is not a cash flow, but a means of accounting for the fact that the up front purchase is not on the income statement. By using cash flows, it is easier to account for the time value of money because the cash flows are represented in the time period in which they occur -- that is not always the case with accounting for economic profit.
b) Depreciation is not included in the calculation of cash flows, because it is not a cash flow. The item that depreciation represents is the…
Foundations of Finance for Ashford University, 7th Edition. Pearson Learning Solutions pp. 333-335
NPV and IBN
Net present value analysis can be used with respect to IBN in a real life investment situation where healthcare organizations are looking to decide where to invest revenues or capital for future expenditures. It may help healthcare organizations calculate the value of cash flows within the organization over varying time periods. Net present value analysis allows organizations to consider the difference in future cash flow values compared with the cost of raising capital for future investments. Organizations can use this analysis to decide whether or not to incorporate certain expenses into IBN.
A healthcare organization can use net present value analysis for example to pick between varying investment projects for example. A hospital could for example decide whether to invest more of its resources in improved technology and security measures or whether to invest more resources in research geared to finding new treatments for cancer patients that…
McLean, Robert A. Financial Management in Health Care Organizations. Canada:
Thompson Delmar Learning, 2002.
Ryan, Bruce and Clay, Scott B. "An Overview of IBNR - Incurred But Not Recorded
Expenses and Liabilities." Healthcare Financial Management, November 1994. 8, October 2005:
The IRR too does not distinguish between the positive investing o negative boowing+ investing situation, whilst the NPV makes a clea distinction.
NPV is supeio to IRR fo mutually exclusive investments. Finally, NPV and IRR make diffeent assumptions when it comes to einvestment assumptions. This can esult in conflicts and cossove in anking of mutually exclusive pojects.
Pofitability Index (PI)
The PI calculates the pesent value of a poject compaed to its cost. It is the sum of the pesent values of the poject divided by the initial cost of the investment.
(Algoithm: PI = NPV / Investment)
Pofitability Index Decision Rule
When faced with mutually exclusive investments with capital ationing (i.e. A limit on the amount of funds available fo investment), choose the poject with the highest PI. (FIN 301)
PI is only used in connection with capital ationing.
This is the numbe of yeas that it…
references, therefore, emphasis is usually placed on one metric above the other, and most managers seem to prefer the NPV.
Fin 301. Chapter 7: Net Present Value and Other Investment Criteria faculty.kfupm.edu.sa/FINEC/mfaraj/fin301/notes/Ch7.pdf