Question
Can someone provide a 1 to 2 paragraph response to the following discussion response below? From the e-Activity, analyze the reasons why the short-term project
Can someone provide a 1 to 2 paragraph response to the following discussion response below? From the e-Activity, analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low.Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return(IRR) ranking of two (2).
To examine the profitability of project, NPV is often used in preparing a budget for the costs of capital. It is quite challengingto determine the profitability of a project because there are several ways to measure the future value of cash flows. In the case of the e-Activity, short-term project may be ranked higher than the long-term project because of the high cost of capital.
Sincethe time value of money states that a dollars future worth may differ from what it is today, it may be more favorable to work on a short-term project. Changes in the cost for capital will directly affect the IRR, whether positively or negatively. The high cost of capital is the reason for the short-term project, since the project would be able to take better advantage of the discount rate. As the NPV formula suggests, the higher the capital, the more ideal it is for success.
From the scenario, take a position for or against TFCs decision to expand to the West Coast. Provide a rationale for your response in which you cite at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive at your decision.
I think the NPV and IRR techniques can be used to determine if TFCs decision to expand is a good choice.The NPV is defined as the present value of a projects expected cash flows discounted at the appropriate risk-adjusted rate (Brigham &Ehrhardt, 2014).It measures how much wealth the project contributes to shareholders and is regarded as the best criterion when deciding which projects to accept.The IRR method is the discount rate that equates the present value of the expected future cash inflows and outflows.IRR measures the rate of return on a project, but assumes that all cash flows can be reinvested at the IRR rate (Brigham &Ehrhardt, 2014).These two techniques are the most useful to me because it shows which projects to accept (projects expected cash flows) and what to expect from the project (rate of return on project).From the scenario using the discount rate of10.92%see the following table for the anticipated cash flows:
YearCash Flow (in Millions)
0-750
1-10
2200
3250
4300
5400
According to this info, the net present value is $23,164,711, IRR = 11.84%, and MIRR = 11.56%. Since the NPV is positive, this indicates the TFCs expansion would be profitable for the company.
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