Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Q. Evaluate of Risk-Adjusted Discount Rate?
Illustration: - From the following date state which project is preferable:
Year
Project A
Project B
1
60000
2
50000
3
40000
Initial Cost of the Project1
120000
Riskless discount rate is 5%. Project A is fewer risky as compared to project B and therefore the management considers risk premium rates at 5% and 10% respectively as appropriate for discounting the cash inflow. The discount factors at 10% and 15% are given below
10%
15%
0.909
0.876
0.826
0.756
0.751
0.650
Solution :-
First Step :- Computation of Risk-Adjusted Discount Rate
For Project A:
Riskless Discount Rate 5%
And Risk-Premium Rate 5%
Risk Adjusted Discount Rate 10%
For Project B:
And Risk-Premium Rate 10%
Risk Adjusted Discount Rate 15%
Second Step: - Computation of Discounted Cash Inflows (that is Present Value and Net Present Value of the Projects)
Project A Discounted Cash Inflows at 10%
Cash Inflows (Rs)
Discount Factor 10%
Present Value (Rs.) (Cash Inflow x Discount Factor)
Discount Factor 15%
.909
54540
80000
.876
70080
.826
41300
.756
45360
.751
30040
.650
32500
PV of Cash Inflow 125880 147940
Less: PV of Cash Outflow 120000 120000
Net Present Value 5880 27940
Comments: - The Net Present Value of Project B is superior to that of Project A. Therefore Project B is Preferable.
Japanese banks borrow in yen and purchase spot dollars from their Western counterparties. Therefore the Western banks are left holding the yen for the time of the loan (three month
Describe the major financial problems of a firm The three questions posed above cover between them the major financial problems of a firm. Or we can say that financial manageme
Q. Nature of the business? The working capital requirement of the firm basic depends upon the nature of the business. public utility undertaking like the water supply and rai
Define in the Modigliani-Miller equation (MM equation), why is the market value of the levered firm greater as compared to the market value of an equivalent unlevered firm? Th
Calculate the Price of Commonwealth bonds Commonwealth Company has a 10% coupon bond with a par value of $1000, The current yield to maturity on new bonds is 8%. If interest is
discuss the applicability of an operation cycle in a vegetation business
Determine The key factor affecting financing Costs Because cost of capital is measured under the assumption that both firm's asset structure and its capital (financial) structu
Foreign Exchange Market Equilibrium: We say that the foreign exchange market is in equilibrium when deposits of all currencies o er the same expected rate of return (when retu
Shareholders' wealth maximization Shareholders' wealth maximization refers to maximization of the net present value of every decision made in the firm. Total present value is e
Cash Flow Valuation Technique The aim of this research is to empirically enquire into how to value a company using discounted cash flow valuation technique within its real lif
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd