analyze the reasons why the short-term project that you have chosen might be ran
ID: 2712169 • Letter: A
Question
analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two
take a position for or against TFC’s decision to expand to the West Coast. Provide a rationale for your response in which you cite at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive at your decision.
Explanation / Answer
The cost of capital plays a very key role in capital budgeting decisions.
If the cost of capital is low;the future value of cash flows will be higher and leads to positive NPV.
For example:
Please consider the following
Present value of future cash flows at 11% discount rate is as follows:
Year
Cash flow
Discount rate@11%
Discounted cash flow
0
-18400
1.00
-18,400.00
1
10700
0.90
9,639.63
2
9600
0.81
7,791.36
3
6100
0.73
4,459.71
21,890.70
Present value of future cash flows at 16% discount rate is as follows:
Year
Cash flow
Discount rate@16%
Discounted cash flow
0
18400
1.00
18,400.00
1
10700
0.86
9,223.40
2
9600
0.74
7,132.80
3
6100
0.64
3,904.00
20,260.20
Year
Cash flow
Discount rate@11%
Discounted cash flow
0
-18400
1.00
-18,400.00
1
10700
0.90
9,639.63
2
9600
0.81
7,791.36
3
6100
0.73
4,459.71
21,890.70
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