Homework Answers
Present value is used extensively because it enables managers to evaluate the present value of an investment, and compare different investments with different project lives, initial investments, and cash flows.
Present value analysis is extremely useful in business decision
making because profitability is not a good measure of a project's
viability. The ultimate goal of financial managers is to maximize
shareholder wealth, and this is achieved by ensuring that there are
adequate cash flows to distribute to shareholders. A project which
is profitable in the books of accounts, but does not generate
adequate cash flow may not be a worthy investment.
Present value analysis overcomes the shortcomings of profitability analysis to focus on the most important goal, which is value creation. It does this by evaluating the net present value of projects by discounting its cash flows to the present. Thus, it measures value generation, as well as accounts for the riskiness of the projects. It further enables comparison of projects with different cash flows and lives.
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5. Present value is used extensively by managers who are reviewing proposed projects. Why is this...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Cash Flow Year Year 1 $300,000 $500,000 $425,000 $475,000...
1. Net present value (NPV) 1. Net present value (NPV) Aa Aa E Evaluating cash flows...
1. Net present value (NPV)
1. Net present value (NPV) Aa Aa E Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Year...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 $325,000 $450,000 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $400,000 Year...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,750,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Fuzzy Button Clothing Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4...
Explain how a net present value (NPV) profile is used to compare projects. How does this...
Explain how a net present value (NPV) profile is used to compare projects. How does this compare to internal rate of return (IRR)? How does reinvestment affect NPV and IRR?
QUESTION 2 a) Explain why Net Present Value is considered technically superior to Payback and Accounting...
QUESTION 2 a) Explain why Net Present Value is considered technically superior to Payback and Accounting Rate of Returns as an investment appraisal technique even though the latter are said to be easier to understand by management. Highlight the strengths of the Net Present Value method and the weakness of the other two methods. (5 marks) b) Your company has the option to invest in projects T and R but finance is only available to invest in one of them....
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions Consider this case: Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 Year 3 Year 4...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Cash Flow Year Year 1 $300,000 $500,000 $425,000 $475,000...
1. Net present value (NPV)
1. Net present value (NPV) Aa Aa E Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Year...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 $325,000 $450,000 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,750,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Fuzzy Button Clothing Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4...
QUESTION 2 a) Explain why Net Present Value is considered technically superior to Payback and Accounting Rate of Returns as an investment appraisal technique even though the latter are said to be easier to understand by management. Highlight the strengths of the Net Present Value method and the weakness of the other two methods. (5 marks) b) Your company has the option to invest in projects T and R but finance is only available to invest in one of them....
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions Consider this case: Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 Year 3 Year 4...
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