Net Present Value (NPV) and Internal Rate of Return (IRR)
This tool looks at a series of cash inflows and outflows of Digitalis in the future and assigns the project a present value. It is important to take into consideration Digitalis’ Weighted Average Cost of Capital (WACC). This is the average return rate that the Digitalis would expect to cover all its investors, for Digitalis this is 15%. China has the highest NPV value of £385 million, higher the NPV, the more attractive project.
NPV fails to consider the presence of potential constraints in Digitalis’ structure that may restrict the amount of capital generated. This potential restrictions may hinder the clarity of the outcome of this project evaluation. Another limitation of NPV is its sensitivity to its discount rate. A slight change in the discount rate would have a considerable effect on the final output of the NPV calculations.
Although IRR is a separate evaluation tool, it is imperative it be read along with NPV. IRR is the discount rate at which, the present value of future cash flow equals Digitalis’ investment. This evaluation tool allows us to understand the investor 's yield on their initial investment. Digitalis should opt for a project that has an IRR value greater than its cost of capital of 15%. China has the highest IRR (30%) of all BRICS projects when compared to cost of capital. This project would generate enough return to compensate investors for using their capital. Since NPV is greater than 0 and IRR is greater than the discount rate, the investment into China seems promising.
The IRR evaluation could be misleading. A project may have a low IRR but a high NPV, meaning that the rate at which investors yield their initial investment may be low, but...
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...Project D being substantially higher than other projects. This NPV value amalgamated with a high IRR value augments our belief in the success of the project. However, investors would take 6.2 years to recover their initial investment but the overall value that would be added to Digitalis is much greater than the other projects. The other facet that increases the probability of success is the profitability Index which is 1.42.
Digitalis should appreciate the demographic advantage of Project D. This demographic advantage allows for Digitalis to have a larger demand population client base. An uncertainty that would affect the profits of Digitalis is the economic slowdown that China is facing. The decrease in GDP amalgamated with a slowdown in foreign investment and tax regulations would augment the uncertainty in the structural working of Digitalis in another country.
Fixed costs of $100,000 plus the variable costs of $60,000 will give us $160,000 in total expenses. The gross ticket sales of $660,000 minus the total expenses of $160,000 give us a yearly net income of $500,000. The new lift has an economic life of 20 years and we would like to make 14% on our investment. The NPV factor of 14% at 20 years is 6.6231. By multiplying our net yearly income or our annuity of $500,000 times the NPV factor of 6.6231 we will have a NPV of $3,311,550.
In SIVMED’s case, based on the definition of WACC, all capital bases should be included in its WACC. These include its common stock, preferred stock, bonds and long-term borrowings. In addition to being able to compute for the costs of capital, the WACC also determines how much interest SIVMED has to pay for all its activities. The value of the firm’s stock, which we want to maximize, depends of the after-tax cash flow. Hence, after-tax values for WACC are also needed. Furthermore, cost of capital is used to determine the cost of each debt, stock or common equity. Being able to analyze these will be essential into deciding what and how new capital should be acquired. Hence, the present marginal costs are ideally more essential than historical costs.
After calculating WACC my second analysis would be of the packaging machine investment. I will use incremental analysis and calculate NPV of the incremental cash flows of both strategies (to wait or to invest now). After calculating NPV’s of both scenarios I will calculate the difference between the two.
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.
...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.
If we look at the sensitivity analysis, we find as WACC increases, the percentage of US$360M investment in Deltex also increases. When WACC is 5.8%, the percentage of US$360M investment in Deltex is equal to 30% equity of Deltex.
This object is one of the financial goals to invest properly. Marriott used discounted cash flow techniques to evaluate potential investment. It is beneficial because it is considered present time value. Projects which increase shareholder value could be formed with benchmark hurdle rates, the company can ensure a return on projects which results in profitable and competitive advantage.
2. Given the forecasts provided in the case, estimate the expected incremental free cash flows associated with Du Pont’s growth strategy and maintain strategy for the TiO2 market. How much risk and uncertainty surround these future cash flows? Which strategy looks most attractive (i.e., using the DCF (e.g., NPV) method)??
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
It is important to clarify some key assumptions that were made in valuing the properties to this NPV. First, the project yields a high IRR of 73 %, due largely in part to the sale of each building upon lease up. For the cash flow projections, it was assumed that all buildings are sold 18 months after construction completion. Therefore, with the exception of the last building to be sold, Heron Quay, the buildings are sold toward the end of their free-rent periods and no rent is collected.
One of such goal and strategic choices include growing its existing operations to more people. What this entail is that the company would expand its existing sites in Cambodia, and Laos with sufficient employees. The second goal and strategic choice facing DDD is to explore ways to expand and become a global organization. Being able to globalize the company will eventually facilitate more contracts and help more people in disadvantaged countries. Furthermore, an important goal and strategic choice facing DDD is whether to engage in partnership with local companies who are already in the IT outsourcing business. These are some of the business goal and strategic choices facing the DDD
Firstly, in assessing ourselves, we determined that our BATNA associated with $37 million. I comprised the cost of building a new plant ($25 million), loss of profits in 12 months ($12 million) and the cost of 90 day option to buy land ($0.5 million). A non-refundable expense of $10 million on buying the option for the land is considered the sunk cost. The maximum amount of money that our group could spend on this buying intention is $40 million. We decided that our target point would be $16 m...
Nike’s weighted average cost of capital. Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models. WACC Approach WACC is the weighted average return on capital that includes both cost of debt and equity, whereby we discount total cash flows by the appropriate discount rates By using the Capital Asset Pricing Model (CAPM), Cohen calculated a Weighted Average Cost of Capital (WACC) of 8.4%. I do not agree with Joanna’s approach for the following reasons.
a. 1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?