1) Two mutually exclusive projects A and B have IRRs of 15% and 20% respectively. The NPV profits of the two projects intersect at 12%. What is the IRR of the incremental project (A • B)? a) 12% b) 20% c) 15% d) 5% e None of the above 2) Gandhi Construction Company builds condos for sale and is deciding whether or not to go ahead with an investment in a new condo construction project. This project is adjacent to a block of condos built last year, which are still not entirely sold. Which of the following should not be treated as part of the new project's cashflows in calculating its NPV? a) The cost of a survey conducted last year by the company to assess the potential market demand for the condos to be built under the new project before the decision to accept or reject the new project has to be made. b) Potential effect on the sales of condos built last year. c) Capital expenditure on an electronic pump that will be needed for the new project. d) An old equipment with a substantial market value to be used in the new project. 3) An Ontario car dealer is expanding into the Maritimes by setting up a new dealership in the region on a plot of land that was purchased for $100,000 but has a current market value of $500,000. Capital gains are taxable at half the regular 40% tax rate of the dealership. How much of the initial investment in the setup of the dealership can be assigned to the plot of land to be used? a) $100,000 b) $500,000 c) $400,000 d) $420,000 e) None of the above 4) The NPV and IRR rankings of projects can be different because of the different assumptions about the rates of return earned on the re-investment of projects' future cashflows.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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