Capital Budgeting Decision-Making Term Paper

Open, View, and/or
Download this Document

Total Length: 421 words ( 1 double-spaced pages)

Total Sources: 0

Finance

The cost of debt is 13%. The cost of common stock, using CAPM, is as follows:

The cost of preferred stock is (10/90)(1-(2/90) = (.11111) / (.9778) = 11.3%

The company's WACC is (.3)(13)+(.16)(11.3)+(.54)(14.15) = 13.349%

The expected cash flow from the investments is the weighted average:

Smelting

Paving

$16,220

$15,800

The standard deviation for the smelting is 2133, while the standard deviation of paving is 10,234.

The coefficient of variation for the smelting is 0.1315 for the smelting and .6478 for the paving.

The paving option has the higher risk. The standard deviation is a good measure of risk and the paving option has a much higher standard deviation. Further, it has a higher coefficient of variation as well. On both measures, the paving option has the higher risk.

7/8. The net present values and IRRs for these two are as follows.

Stuck Writing Your "Capital Budgeting Decision-Making" Term Paper?

View All Our Example Capital Budgeting Decision-Making Term Paper

Have A Custom Example Essay Written

First, the smelting:

Smelting

Year

Flow

-45000

16220

16220

16220

16220

d

0.13349

npv $2,898.16

irr

16%

And then for the paving:

Paving

Year

Flow

-45000

15800

15800

15800

15800

d

0.16349

npv

-$1,094.99

irr

15%

According to the decision rules, the smelting project has a positive NPV and therefore would be acceptable. The IRR is higher than the cost of capital. However, the paving project was given a higher hurdle rate, based on the WACC + 3%, so it has a negative NPV, and would therefore be rejected. In addition, it has the lower IRR, which means that it would be rejected when compared with the smelting project anyway, because they are mutually exclusive.

There is, however, a conflict between the two methods. The use of a higher hurdle rate for the paving project is inconsistent. The point of using the.....

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Capital Budgeting Decision-Making" (2015, August 04) Retrieved May 20, 2025, from
https://www.aceyourpaper.com/essays/capital-budgeting-decision-making-2152863

Latest MLA Format (8th edition)

Copy Reference
"Capital Budgeting Decision-Making" 04 August 2015. Web.20 May. 2025. <
https://www.aceyourpaper.com/essays/capital-budgeting-decision-making-2152863>

Latest Chicago Format (16th edition)

Copy Reference
"Capital Budgeting Decision-Making", 04 August 2015, Accessed.20 May. 2025,
https://www.aceyourpaper.com/essays/capital-budgeting-decision-making-2152863
   

Open, View, and/or
Download this Document
order custom essay example