Financial managers to maximize shareholders wealth

Assignment Help Financial Management

Reference no: EM131599979

The objective of a firm is to maximize shareholder wealth. The Net Present Value (NPV) method is one of the useful methods that help financial managers to maximize shareholders’ wealth.

Suppose the company that you selected for the Module 1 SLP is considering a new project that will have an initial cash outflow of $125,000,000. The project is expected to have the following cash inflows:

Year Cash Flow ($)

1 2,000,000

2 3,500,000

3 13,500,000

4 89,750,000

5 115,000,000

6 120,000,000

If the project’s cost of capital (discount rate) is 12.5%, what is the project’s NPV? Should the project be accepted? Why or why not?

You may use the following steps to calculate NPV:

1. Calculate present value (PV) of cash inflow (CF)

PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5 + CF6 / (1+r)^6

Where the CFs are the cash flows and r = the project’s discount rate.

2. Calculate NPV

NPV = Total PV of CF – Initial cash outflow

or -Initial cash outflow + Total PV of CF

r = Discount rate (12.5%)

Besides NPV, there are other capital budgeting methodologies including the regular payback period, discounted payback period, profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR). These methodologies don’t necessarily give the same accept/reject decisions as NPV.

If the firm has a requirement that projects are paid back within 3 years, would the project be accepted based off the regular payback period? Why or why not? Would the project be accepted based off the discounted payback period? Why or why not?

What is the project’s internal rate of return (IRR)? Based off IRR, should the project be accepted? Why or why not? Recall the project’s cost of capital is 12.5%. What is the project’s modified internal rate of return (MIRR)? Based off MIRR, should the project be accepted? Why or why not?

What are the advantages/disadvantages of NPV, regular payback, discounted payback, PI, IRR, and MIRR? Present these advantages/disadvantages in a table.

Reference no: EM131599979

Questions Cloud

Security is issued offshore or in the international market : What does it mean if a security is issued “offshore” or in the “international” market?

Credit card bill in five years of equal monthly installments : If he wishes to pay off his credit card bill in 5 years of equal monthly installments, what monthly payments must he make?

Has liquidity position changed over the past several years : How liquid is the firm? Has the liquidity position changed over the past several years? And How?

What is the degree of total of haunted forest : what is the degree of total (combined) leverage of Haunted Forest, Inc.?

Financial managers to maximize shareholders wealth : The Net Present Value (NPV) method is one of the useful methods that help financial managers to maximize shareholders’ wealth.

Identify two different risks company may face : Identify two different risks a company may face if it has operations in a foreign country (i.e., types or sources of country risk).

The time value of money : Mary has been working for a university for almost 25 years and is now approaching retirement.

The corporate veil-the corporation as a legal entity : The corporate veil: The Corporation as a Legal Entity - Do you think that corporations should have rights similar to those of natural persons?

Will bob be able to void the contract : Bill and Bob opened a restaurant selling home-cooked meals. When Bob was informed about the contract, he tried to have the contract voided.

User Account

All Pages