Describe the logic behind the npv

Assignment Help Finance Basics

Reference no: EM131488600

Question: This Mini Case is available in MyFinanceLab. Microfinance Company Alfa Cash Capital had financial problems recently. According to independent auditors' report, the main sources of the problems were a shortage of financial analyses and ignorance of capital budgeting issues. To address the issues, the founders of the company created a financial council that will be in charge of the company's financial analyses.

Members of the council are new people with various financial backgrounds, and they decided to make in-depth analyses of every proposed project. Alfa Cash Capital is considering a long-term investment of $500,000 for 15 years. The required rate of return is 15 percent. Since the council thinks that 15 years is quite a long time-period it made the following decision rules for acceptable of investment projects:

(a) NPV should be positive;

(b) pay-back period should be a maximum of 8 years; and

Task 1: Analyze both investments for all possible criterions, and answer the following questions:

a. Why is the capital-budgeting process so important?

b. Why is it difficult to find exceptionally profitable projects?

c. What is the payback period on each project? Which of these projects should be accepted? d. What are the criticisms of the payback period?

e. Determine the NPV for each of these projects. Should either project be accepted?

f. Describe the logic behind the NPV

g. Determine the PI for each of these projects. Should either project be accepted?

h. Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not?

i. What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased?

j. Determine the IRR for each project. Should either project be accepted? k. How does a change in the required rate of return affect the project's internal rate of return? l. What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?

Task 2: The founders of Alfa Cash Capital are not quite happy with this policy, since they think that now the company is too strict with its investments and may lose potential customers. Evaluate the investment police. Explain what factors may ease the processes.

Reference no: EM131488600

Questions Cloud

What is the equivalent annual annuity : (Calculation equivalent annual annuity) Industrial Zone Group, which operates in building industry in South Caucasus, is considering making investments.

How will you utilize new knowledge : How well did you accomplish the two goals you set in your introduction in Week One? What were two or three things that had the greatest influence on the outcome of your goals?

What are the projects equivalent annual annuities : (Equivalent annual annuity) The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it.

Evaluate technology solutions in the health care industry : Select and propose a specific EHR system for the UMUC Family Clinic. The system should be one that would improve the patient visit.

Describe the logic behind the npv : This Mini Case is available in MyFinanceLab. Microfinance Company Alfa Cash Capital had financial problems recently. According to independent auditors' report.

How does femas infrastructure protection plan address : What do they in common? How does FEMA's Critical Infrastructure Protection Plan address key requirements set for by Clemente (2011)?

What are the strategic justifications for your firm : What are some key financial differences between the three companies in the simulation?

Brief back ground of the business operations : Brief back ground of the business operations. Motivations for the firm to expand their operations in the Asian markets.

How do sunk costs affect the determination of cash flows : Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions? Why are we interested only in incremental cash flows.

User Account

All Pages