QUESTION Data for Morton Chip Company and its industry averages follow.Calculate the indicated rationsConstruct the extended DuPont equation for both Morton and the industryOutline Mortons strengths and weaknesses aas revealed by your analysisSuppose Morton had doubled its sales as well as its inventories, ¦ The ratios for Morton given the Balance Sheet and Income Statement […]
QUESTION NPV versus IRR Bumbles Bees, Inc., has identified the following two mutually exclusive projects:a. What is the 1RR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?b. if the required return is 11 percent, what is the NPV for each of these […]
QUESTION Can you use an example to explain how time value of money can be applied to your personal money management? Compare the difference between bonds and common stocks. If your investment portfolio only includes bonds and stocks, what percentage of your investment will be bonds and what percentage of yo¦ Theory Of Time Value […]
QUESTION In capital budgeting, what is a conventional cash flow pattern? s with a conventional cash flow pattern will have the following mathematical signs with plus denoting inflow and minus denoting outflow, . The project has an initial outflow in period zero which is accompanied by cash inflows in the period 1-5. ANSWER: […]
QUESTION How is the profitability index (PI) related to the NPV method? What does the PI measure? mutually exclusive projects when evaluated on the basis of Net Present Value and profitability index. For example if the Present Value of cash inflows for two projects A and B is $ 10,000 and $ 20,000 with the […]
QUESTION How is risk defined in capital budgeting analysis? List several aspects of a project in which risk is involved and how risk can affect a projects net present value. ;p class=MsoListParagraphCxSpLast style=text-indent: -.25in; mso-list: l0 level1 lfo1;>Market rate of interest (If market rate of interest rises NPV is expected to fall and vice versa) […]
QUESTION How can FCF in the terminal year of a projects life differ from FCF in the other years? to meet such cost and the free cash flow for the terminal year goes below the normal free cash flow as derived in other years. Thus the biggest reason for difference in free cash flow in […]
QUESTION Explain why the cost of capital is referred to as the ?ohurdle?? rate in capital budgeting. The project is accepted only when the cash flows discounted at the cost of capital results in the positive net present value. A positive net present value implies that the project will earn a return which will be […]
QUESTION Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the projects MIRR? Note that a projects projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.WACC: 8.75%YearCash flows0..($1,000)1..$4502..$4503..$4501. 12.23%2. 16.90%3. 11.41%4. 13.74%5. 14.16% Future Value of Terminal […]
QUESTION Describe the alternatives to using a firms WACC as a discount rate when evaluating a project. ate the project, instead of WACC, as in certainty equivalent technique. Since the firm is sure about the future cash inflows, hence there is no risk with regard to collection of those cash flows, hence the risk free […]
