Flow 50000 salvage value 50000 17000 17000 tax on

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Unformatted text preview: vage Value 50,000 (17,000) (17,000) Tax on Capital Gain 4,000 Recapture of NWC 4,000 Terminal Cash Flow Terminal Step 1: Evaluate Cash Flows Step c) Terminal Cash Flow: What is the cash c) Terminal flow at the end of the project’s life? flow 50,000 50,000 (17,000) (17,000) 4,000 4,000 37,000 37,000 Salvage Value Tax on Capital Gain Recapture of NWC Terminal Cash Flow Project NPV: Project CF(0) = -151,000 CF(0) -151,000 CF(1 - 4) = 46,461 CF(1 46,461 CF(5) = 46,461 + 37,000 = 83,461 CF(5) 83,461 Discount rate = 14% Discount 14% NPV = $27,721 NPV $27,721 We would accept the project. We accept the Incorporating Risk into Capital Budgeting Capital Risk-Adjusted Discount Rate How can we adjust this model to take risk into account? to n NPV = NPV Σ t=1 ACFt ACF t (1 + k) - IO How can we adjust this model to take risk into account? to n NPV = NPV Σ t=1 ACFt ACF t (1 + k) - IO Adjust the discount rate (k). Risk-Adjusted Discount Rate Risk-Adjusted Simply adjust the discount rate (k) to reflect higher risk. to Riskier projects will use higher Ris...
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This note was uploaded on 01/17/2014 for the course GEB 3375 taught by Professor Sweo during the Winter '08 term at University of Central Florida.

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