Capital Budgeting_Decision Rules

# Capital Budgeting_Decision Rules - Capital Budgeting...

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1 Capital Budgeting: Decision Rules P’ O Tuitional BBA Business Finance Expected After-tax Net CF Year Project S Project L 0 -1,000 -1,000 1 500 100 2 400 300 3 300 400 4 100 600 ขอแทรกเนื้อหา : NPV Profiles A graph which plots a project’s NPV against the discount rates. To construct NPV profiles, first note that at zero discount rate, the NPV s = \$300, and NPV L =\$400. Next, we calculate the NPVs at three discount rate, 5, 10, and 15 percent, and plot these values. Recall that IRR make NPV=0, therefore, the point where its NPV profile crosses the horizontal axis indicates a project’s IRR. NPV Profiles: graphing Discount Rate NPV S NPV L 0% \$300 \$400 5% 10% 15%

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2 • Conflicts: – Project L has the higher NPV at low discount rate (WACC), while Project H is so cute……. ,While Project S has higher NPV if the discount rate (WACC) is greater than the 7.2% crossover rate. 1. Calculate Payback period and Discounted Payback period. Payback period defined as the expected number of years required to recover the original investment. 2. Calculate NPV 3. IRR - If both projects have a cost of capital of 10%, then the IRR rule indicates that we should …………… 4. MIRR for Projects S (WACC = 10%) - MIRR assume that cash inflows are reinvested at the cost of capital, while the regular IRR assumes that they are reinvested at project’s own IRR.
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