disscusion week 5 - PV of the inflows equals the PV of...

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1. You have been asked to make a short presentation Lets look at three important steps in figuring capital budgeting. We need to understand how to make long-term decisions and the potential to fix the asset property. The Net Present Value (NPV) formula is NPV=PV of inflows minus Cost = Net gain in wealth. A quick gage to accept is NPV>0 and reject NPV < 0. This will determine the value to the firm. Next is payback that measures a projects risk and liquidity. We can compute this as CFO=initial outlay. We can also use this to measure a projects risk and liquidity. The problem is the payback ignores time value money and cash flow payback. The last one is IRR or Internal Rate of Return which is the expected rate of return on investment. The IRR is the interest rate when the
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Unformatted text preview: PV of the inflows equals the PV of outflows. The problem with is when you have multiple IRR’s or non-normal type projects. The best method to use is the NPV method. The other two methods can give some erroneous data. 2. The senior executives were impressed. The Weighted Average Cost of Capital is the amount of debt and equity a company must maintain. This is the return on existing assets and business operations. This is in direct correlation to the current value of stock. The formula is [Rd x D/V x (1-5)] + [Re x E/V}. Rd= Bonds yield, D=market value, 1-tax rate; Re is the share holders return on requirement. This is used to find the rate of return and help to calculate current stock price....
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