The first thing Tremont has to do is to start using a different discount rate. Rather than using the CFO’s suggested cost of debt as the discount rate, it would be more appropriate to use Weighted Average Cost of Capital, as Tremont uses a mix of debt and equity. Next, given that Tremont has two mutually exclusive options for what to do with their property, it is important to review the different metrics we have calculated and focus on which is the better approach for Tremont. While EAA is calculated in the analysis, the equal timelines of the two mutually exclusive projects are the same, so EAA is largely irrelevant in this case. Additionally, the CFO’s requested Payback Period metric is simplistic and doesn’t consider time value of money, so it also should not be considered. Even Discounted Payback Period, which does take time value of money into account, still is based on an arbitrary cutoff point for decisions, so it is not helpful with our investment decisions. Additionally, Tremont should be looking to generate the maximum amount of value possible from their mutually exclusive projects, rather than just getting their money back as soon as possible. That leaves us with three relevant measures: IRR, NPV, and Profitability Index. Among the three NPV will be preferred to the IRR and …show more content…
For one, if there is a low-end estimate on the cost of renovation and equipment, then the Build option’s NPV goes up to $903,489, a $498,351 increase over the base case’s NPV of $405,138. However, it would be unfair to compare this figure to the base case NPV for the Lease option, and indeed in comparison to the low-end estimate for the cost of renovation and equipment in the Lease option, the Lease option has the better NPV ($924,173). When examining the converse situation (high-end estimate), the Lease option still has a better NPV than the build
After calculating the Net Present Value (NPV) and the Internal Rate of Return (IRR) for each project, I have determined that both the dishwasher and the trash compactor projects should be pursued. Both of them have shown positive NPVs at the new discount rate of 11.58% (WACC). Another indicator that told me that these two projects should be pursued by Star was that they both yielded IRRs greater than the given hurdle rate. The disposal did not meet these requirements and therefore should not be undertaken.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
...eting tool that show the differences between the present value of revenues and the present value of expenses. The project can be profitable when the net present value is positive. In other words, the present value of revenues is greater than the present value of expenses. Profitability index is another tool for evaluating investment projects, which is the ratio of the PV of benefits on the PV of costs. A project can be beneficial if the profitability index is greater than 1. Also, it has the same idea as NPV that In other words, the present value of benefits is greater than the present value of costs. However, these two methods (NPV and Profitability Index) have been used to evaluate the proposal of implementing EHR.
Based on the information in the case, Pepsi could invest US$360 million in exchange for 30% equity of Deltex. So we have to calculate the value of 30% equity of Deltex. First, we calculated the discount factor by using average unlevered beta of US independent bottlers, US 10 year Treasury bond as risk free rate and assuming market risk premium 10%. We came up with 9.83% of WACC. Next, we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow, we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo.
There are many ways to analyze the performance of a company, some more popular than others. According to the Barney text the accounting method is the most popular way of measuring a firm's performance (Barney, 2002). Some of the reasons for the popularity could include the fact that accounting measures of performance are publicly available on many firms and they communicate a great deal of information about a firm's operations. Other methods of performance analysis include firm survival and the multiple stakeholder approach.
This analysis shows that the projects NPV as 13.37 million dollar. Our result is slightly different than the presenting team because of rounding. But both of our teams had positive NPV which suggest that the project should be accepted.
Third Star Financial Services is an “un-banked” business that was built from a foundation of several money transfer operations that can be transact through an agent or an online facility since 1996. Third Star’s goal and objective is to develop and implement an enterprise architecture platform for the organization that is more streamlined and leaned with consistent policies and procedures throughout the company. A consolidated, centralized and standardized single version of the business structure and a modernize technology that can provide ease and flexibilities to their new and existing customers, in addition to their support staff and management teams.
On the other hand, all Jensen 's alpha, Sharpe ratio and Treynor measure are used to indicate the risk-adjusted measurement of performance. Firstly,
The times interest earned ratio uses a company’s income statement to assess its ability to meet long-...
The (I) is 8% while the (N) increases as the free cash flows are discounted yearly. Therefore, 2015 is one period while 2020 is six periods. Home Depot is not making payments, so the (PMT) variable remains zero. The future values (capital leases) are listed in the millions. To calculate 2015’s present value, utilizes the following formula: PV = (0.08, 1, 0, 113) and the present value is ($104.63) million. The (I) and (PMT) variables remain constant while the (N) variable increases and (FV) variable decreases. Therefore, 2016’s formula is PV = (0.08, 2, 0, 111) and the present value is ($95.16) million. The 2017, 2018, 2019, and 2020 present values are ($85.73) million, ($74.24) million, ($66.02) million, and ($554.55) million respectively. After the individual present values are calculated, they are combined to calculate Home Depot’s 2014 present value, which is ($980.33) million (The Home Depot, Inc. Form 10-K 2015) (Ehrhardt 2017). (Appendix
value. One of the most popular one is the mercer index which is widely accepted by
Explain why in practise other methods of evaluating investment projects have proved to be more popular with decision-makers than the net present value method. (Please compare at least three (3) methods)
What do you understand by the phrase “stakeholder analysis”? Attempt a stakeholder analysis of an organisation that you are closely associated with.
Before the introduction of the balanced scorecard tool, only financial measures were used to determine the organi...
In this case study it was stated that there were a problem happen in the outsourcing for the Royal Bank of Scotland. What happen was there were an error that happen during the routine software upgrade that cause million of that bank customer cant access to their account. The error happen when one junior technician in India was accidently wiped all the information during the routine software upgrade. The member of staff that was working under the program for the Royal Bank of Scotland, NatWest and Ulster Bank and it was based in Hyderabad, India.