Revision to Final Examination - LOGO MBAFinancialManagement...

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1 LOGO Revision to Final Examination MBA Financial Management 2 What have we learned? Chapter 7 Making Capital Investment Decisions Chapter 8 Risk Analysis, Real Options, and Capital Budgeting Chapter 9 Risk and Return: Lessons from Market History Chapter 10 Return and Risk: The Capital Assets Pricing Model (CAPM) Chapter 11 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Chapter 12 Risk, Cost of Capital, and Capital Budgeting 3 Chapter 7 Making Capital Investment Decisions •Equipment cost •NWC OCF =[Operating Income*] x( 1-t)+(Depre x t) •SV •Tax on SV •NWC 4 Cash Flows – Not Accounting Income Sunk Costs Opportunity Costs Side Effects Allocated Costs
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5 Equivalent Annual Cost Analysis Suppose a firm must choose between two machines of unequal lives. Both machines can so the same job, but they have different operating costs and will last for different time periods. A simple application of the NPV rule suggests taking the machine whose NPV is higher. This choice might be a mistake! 6 Countercheck (1) Calculating Nominal Cash Flow Sinhalese Artworks Limited is considering an investment of LKR 250,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be LKR 200,000 and LKR 50,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3%. Sinhalese will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be of LKR 30,000 in nominal terms at that time. The one-time net working capital investment of LKR 10,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34% tax rate. What is the project’s total nominal cash flow from asset for each year? 7 Calculating Project NPV Scott Investors, Inc., is considering the purchase of a $500,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-
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This note was uploaded on 10/19/2010 for the course INTERFIN Interfin12 taught by Professor Chadapa during the Spring '10 term at Chulalongkorn University.

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Revision to Final Examination - LOGO MBAFinancialManagement...

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