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Case 3: Time Value of Money and Capital Budgeting - Coursework Example

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Lets take the reinvestment rate to be 10%. Therefore, FV of positive cash flows = 150,000(1.1)^2 + 250,000(1.1)^1 + 350,000 = 806,500. The PV of negative cash flows =…
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Case 3: Time Value of Money and Capital Budgeting
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Download file to see previous pages The PV of the negative cash flow = 1,722,000. Therefore, the MIRR = {5,430,732/1,722,000}^1/6 – 1 = 21.1 %.
The firm should adopt project B. The supporting argument is that comparatively, project B has a positive NPV while project A has a negative NPV. A positive NPV is an indication of a possible future growth and financial stability. Therefore, investors who wish to create wealth should consider undertaking project B. The second reason for preferring project B is that the IRR is greater than the cost of capital. That is 36.67 % > 8.5 %. The IRR is used to determine whether an investment would generate high returns to facilitate the payment of interest on cost of finance (Marx 212-289).
The amount to be drawn after retirement is $ 3000 per month (12*3,000) = $ 36,000 per annum. The expected life span after retirement is 20 years. Therefore, the requirement is to save (36,000*20) = $ 720,000 in a period of 35 years before retiring in order to meet my expenditure level of 36,000 per annum. This scheme amounts to an ordinary annuity in which $ 720,000 is the future value, n = 35 years, annuity = $ 9,600 per annum and r ...Download file to see next pagesRead More
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