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    rachita
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    This document discusses key concepts related to capital investment evaluation. It addresses: 1. The cost of capital (12%) reflects the risk of a project and the rate of return expected. A higher-risk project would require a higher rate of return. 2. To make an NPV positive, one could extend the project period, lower costs, negotiate machine costs lower, or increase cash inflows. 3. Payback period calculates the number of years to recover the initial investment through cash inflows. It ignores the time value of money and cash flows beyond the payback period. There is no objective decision criteria as with IRR and NPV.

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    This document discusses key concepts related to capital investment evaluation. It addresses: 1. The cost of capital (12%) reflects the risk of a project and the rate of return expected. A higher-risk project would require a higher rate of return. 2. To make an NPV positive, one could extend the project period, lower costs, negotiate machine costs lower, or increase cash inflows. 3. Payback period calculates the number of years to recover the initial investment through cash inflows. It ignores the time value of money and cash flows beyond the payback period. There is no objective decision criteria as with IRR and NPV.

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    29 Ansichten2 Seiten

    FFM

    Hochgeladen von

    rachita
    This document discusses key concepts related to capital investment evaluation. It addresses: 1. The cost of capital (12%) reflects the risk of a project and the rate of return expected. A higher-risk project would require a higher rate of return. 2. To make an NPV positive, one could extend the project period, lower costs, negotiate machine costs lower, or increase cash inflows. 3. Payback period calculates the number of years to recover the initial investment through cash inflows. It ignores the time value of money and cash flows beyond the payback period. There is no objective decision criteria as with IRR and NPV.

    Copyright:

    © All Rights Reserved
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    von 2

    1.

    Cost of capital for such investments is 12 %


     Cost is 35000 12 % is what it costs you to raise .
     12@ discount rate - WACC / HURDLE RATE / OPPORTUNITY COST
     WHAT DOES IT REFLECT?
     Reflection of risk of project
     In what situations it will be higher than 12%?
     When the risk is high they want higher rate of return.
     How is it dependent on project?
     PER YEAR – ANNUITY
     PRESENT VALUE OF CASH INFLOWS – FOR NPV
     SINGLE SUM – PV USE
     NOT SINGLE SUM – NPV
     NPV OF PROJECT DIFF FROM NPV OF EXCEL
     CASH INFLOWS HAS TO BE INCREMENTAL AND ATTRIBUTABLE TO PROJECT ---- EXTRA
    5000 ON ACCOUNT OF PROJECT
     LOST SALES ON ACCOUNT OF NEW MODEL IS COST
     SHOULD BE ASSIGNED TO PROJECT
     IT SHOULD NOT BE SUNK COST ( LIKE MONEY IS SPENT ON BUILDING NOW WHAT TO DO
    WITH IT )
    2. How can you turn npv to positive figure?( you have to really careful where there is
    scope do )
     Longer period
     Decrease cost of capital
     Bargain for cost of machine
     Increase cash inflows
    3. How do you calculate payback period?
    1. In how many years will you be able to recover investment
    2. Investment / what cash flows you getting per year
    3. Not a great method as ignores time value of money
    4. Considers cash flow only upto that period and not beyond .
    5. DECISION CRITERIA - very subjective criteria( 7 yrs maybe good to some
    maybe not good to some ) unlike irr npv very much objective
    6. Rarely relied upon due to emotional factor
    7. To avoid that you have discounted payback period that still has problem of
    deciding criteria
     PERPETUAITY --- An annuity received forever or for an indefinite
    period of time , NO DEFINITE PERIOD , LIFE OF AN QUITY SHARE IS
    INDEFINITE BECAUSE LIFE OG COMPANY IS FOREVER GOING
    CONCERN CONCEPT . BECAUSE WHEN YOU FLOAT A COMPANY IT
    WILL CONTINUE FOREVER.
    PV OF PERPETUAITY – cash flow from annuity PER year / RATE
    COST OF EQUITY 15 %
    DIVIDEND RS 5 ON FIRST YEAR
    WHAT IS THE VALUE OF MY SHARE ?
    VALUE OF ANY ASSET – SUM OF PV OF ALL GAINS YOU GET FROM
    OVER ITS LIFETIME ASSET
    VALUE OF SHARE = 5/.15
    OR VALUE OF PERPETUAITY IS BASED ON CASH FLOW OF NEXT YEAR

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