You have just been named the chief financial officer of Fabco, a large metal fabricator located in

Question:

You have just been named the chief financial officer of Fabco, a large metal fabricator located in Chama, New Mexico. The company has long been a user of the net present value method for evaluating its investment projects. The firm undertakes all projects offering a positive net present value, based upon data submitted by the project proposer. Fabco’s weighted cost of capital has been estimated to be 15 percent. This capital cost has remained approximately constant over the past five years.

Over the past five years, Fabco has earned a return on assets averaging 8 percent. You are concerned about the apparent disagreement between Fabco’s cost of capital and its earned returns. The CEO has asked you to prepare a report on the situation. What factors (both within and outside of the firm) might account for this apparent discrepancy in performance?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...