StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Case 3: Time Value of Money and Capital Budgeting - Coursework Example

Cite this document
Summary
Lets take the reinvestment rate to be 10%. Therefore, FV of positive cash flows = 150,000(1.1)^2 + 250,000(1.1)^1 + 350,000 = 806,500. The PV of negative cash flows =…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER96.9% of users find it useful
Case 3: Time Value of Money and Capital Budgeting
Read Text Preview

Extract of sample "Case 3: Time Value of Money and Capital Budgeting"

Download file to see previous pages

The PV of the negative cash flow = 1,722,000. Therefore, the MIRR = {5,430,732/1,722,000}^1/6 – 1 = 21.1 %. The firm should adopt project B. The supporting argument is that comparatively, project B has a positive NPV while project A has a negative NPV. A positive NPV is an indication of a possible future growth and financial stability. Therefore, investors who wish to create wealth should consider undertaking project B. The second reason for preferring project B is that the IRR is greater than the cost of capital.

That is 36.67 % > 8.5 %. The IRR is used to determine whether an investment would generate high returns to facilitate the payment of interest on cost of finance (Marx 212-289). The amount to be drawn after retirement is $ 3000 per month (12*3,000) = $ 36,000 per annum. The expected life span after retirement is 20 years. Therefore, the requirement is to save (36,000*20) = $ 720,000 in a period of 35 years before retiring in order to meet my expenditure level of 36,000 per annum. This scheme amounts to an ordinary annuity in which $ 720,000 is the future value, n = 35 years, annuity = $ 9,600 per annum and r

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Case 3: Time Value of Money and Capital Budgeting Coursework”, n.d.)
Case 3: Time Value of Money and Capital Budgeting Coursework. Retrieved from https://studentshare.org/finance-accounting/1632070-case-3-time-value-of-money-and-capital-budgeting
(Case 3: Time Value of Money and Capital Budgeting Coursework)
Case 3: Time Value of Money and Capital Budgeting Coursework. https://studentshare.org/finance-accounting/1632070-case-3-time-value-of-money-and-capital-budgeting.
“Case 3: Time Value of Money and Capital Budgeting Coursework”, n.d. https://studentshare.org/finance-accounting/1632070-case-3-time-value-of-money-and-capital-budgeting.
  • Cited: 0 times

CHECK THESE SAMPLES OF Case 3: Time Value of Money and Capital Budgeting

Corporate Finance of Aviva Company

( (Miles and Ezzell, 1980; “Weighted average Cost of Capital”) The weight of equity can be defined as the ratio of market capitalization to the market value of the firm and the weight of debt can be defined as the ratio of the market value of debt to the market value of the firm.... The total market value of a firm is generally measured by summing the total market value of equity and the total market value of debt....
9 Pages (2250 words) Case Study

The Investment Detective - Finance Case 17

This is of necessity due to the time value of money.... This is of necessity due to the time value of money.... Payback method normally overlooks the time value of money.... The drawbacks of Payback period and IRR method make NPV the best method for capital budgeting (Baker, 2011).... capital budgeting Valuation: Financial Analysis for Todays Investment Projects.... roject 2 and 6 relate to actual venture capital project in which, bulks of cash inflows are realized at the end of maturity period, but some cash inflows can also occur at the beginning of the period (Baker, 2011)....
2 Pages (500 words) Case Study

Coffee Manufacturing Company

nbsp;… The purpose of this report is to examine the current projection of sales of the New Home Grinder Cappuccino Machine for the purpose of capital budgeting in Coffee Manufacturing Company (CMC) and assess the relevant cash flow in terms of forthcoming profitability, financial stability and the potential liquidity risk of New Home Grinder Machine.... s the discussion highlights capital budgeting expenditure is usually of very high value; therefore, the management must undertake a careful analysis before resolving to put money in such projects....
5 Pages (1250 words) Case Study

Real Estate Investment Analysis

Discounted cash flow (DCF) is used in valuing projects, assets or investments by taking into account the time value of money.... It is a modern method in capital budgeting and it takes into account the time value for money.... The initial capital outlay is based on the value of assets.... The concept of time value for money states that a shilling today is worth than a shilling tomorrow.... This is not the case as the rate can be determined using methods such as capital asset pricing model (CAPM) and the weighted average cost of capital (WACC)....
6 Pages (1500 words) Case Study

Financial Management in the Jovi plc Company

This paper 'Financial Management in the Jovi plc Company" focuses on the fact that the Financial Management deals with areas like determining Financial needs, selecting the sources of funds, financial analysis, and interpretation, Cost Volume Profit Analysis, capital budgeting.... Company Jovi plc is more concerned about the utilization of money in the most effective way.... The three options are:Since the company is desperately in need of additional working capital and since external borrowings would attract regular mandatory payment of interest which would become a burden to the future cash flows of the company....
7 Pages (1750 words) Case Study

New Mobile Phone Project

Investment appraisal is an integral part of capital budgeting and is applicable to areas even where the returns may not be easily quantifiable such as personnel, marketing, and training” (Gotze et al, 2007, p24) (Fisher and Martin, 1994).... The calculations indicate that Project S has the highest IRR value of 26.... Investment appraisal is defined as the“Evaluation of the attractiveness of an investment proposal, using methods such as average rate of return (ARR), internal rate of return (IRR), net present value (NPV), or payback period (PP)....
8 Pages (2000 words) Case Study

Financial Break-Even at Rediform Concrete

the salvage value of the factory will be $3 million.... With the help of the capital Asset Pricing Model the rate of return is investigated; for pricing the risky securities, an understanding of the relationship between the risk and the expected return is analyzed.... hellip; Rediform Concrete is considering a $5 million capital investment for a factory to manufacture formed concrete products, such as patio stones, mobile home stones, and lawn decorations....
12 Pages (3000 words) Case Study

The Benefits of Investment in the Medco Republic

NPV has been described further as a parameter being “used in capital budgeting to analyze the profitability of an investment or project”.... et present value, or simply NPV, is defined simply as the “difference between the present value of cash inflows and the present value of cash outflows”.... Using investment parameters such as the Net Present value (NPV) and the Internal Rate of Return (IRR), the report will analyze whether the investment in the Medco Republic is worth undertaking considering the risks....
7 Pages (1750 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us