FIN 534 Week 6 Discussion 6 - Week 6 Discussion Question 1:...

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Week 6 Discussion Question 1: The Basics of Capital Budgeting: Evaluating Cash FlowsElaborate on why the net present value (NPV) of a relatively long-term project is moresensitive to changes in the cost of capital than is the NPV of a short-term project. Providetwo (2) examples of NPV that support your position.Net present value is the total present value of a series of time flows. This is typically thestandard method for long term projects and is the sum of time of cash flow, discount rate (rate ofreturn), the net cash flow at the time. With NPV being a big decision model if you have to decidebetween two projects you pick the one with the higher NPV. If NPV>0 the project should beaccepted, NPV<0 rejected and = means no monetary value either way (Brigham & Ehrhardt,2014). Short and long term projects are important because let’s say are mutually exclusive andboth had an NPV>0 it would be accurate to pick the long term one since it will over time it addsmore value than a short term liquid project (Brighman & Ehrhardt, 2014).After understanding NPV we learn how it effects long term in terms of cost of capital.Inorder to figure out the changes in capital over long periods of time which happens on long termproducts you then need to look at the IRR (internal rate of return). There are as we discussedpreviously many things that can happen with long term projects out of a company’s control liketax rates, interest rates, and the economy which will effect capital.Project X has maturity period 5 years and Project Y has maturity period of 10 years, bothhave 10% of cost of capital, and both have $500 cash flow every year. Then,Cash flow for Project X = (454.54 + 413.22 + 375.65)Cash flow for Project Y = (454.54 + 413.22 + 375.65 + 341.53 + 310.37)

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