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What is the NPV of a project that has an IRR exactly equal to its cost of capital?
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What is the effect on IRR if cost of capital decreased?
A change in the cost of capital will not, typically, impact on the IRR. IRR is measure of the annualised effective interest rate, or discount rate, required for the net present values of a stream of cash flows to equal zero. The IRR will not be affected by the cost of capital; instead you should compare the IRR to the cost of capital when making investment decisions. If the IRR is higher than the cost of capital the project/investment should be viable (i.e. should have a positive net present value - NPV). If the IRR is lower than the cost of capital it should not be undertaken. So, whilst a higher cost of capital will not change the IRR it will lead to fewer investment decisions being acceptable when using IRR as the method of assessing those investment decisions.
What is the meaning of expected net present value?
It is the expected value of all cash flows of a project brought back to the present value, by discounting it by the cost of capital involved in the project.
A project has an initial cost of 52125 expected net cash inflows of 12000 per year for 8 years and a cost of capital of 12 percent What is the projects MIRR and What is the projects PI?
The MIRR of this project is 13.89% and the PI is 1.13.
What do you understand by cost of capital?
cost of capital
Weakness of the internal rate of return approach is that?
it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital
If the opportunity cost of capital for a project exceeds the projects IRR then the project has a NPV negative?
If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n)
A firm's cost of finaning in an overall sense is equal to its?
Weighted average cost of capital.
Is the cost of capital the opportunity cost of project money?
I think the opportunity cost of a firm using investments towards capital is using the investments to buy land, expand the size, or the next best alternative.
The cost of capital is the minimum return a project has to earn in order for it to be accepted True or False?
true
Suppose a firm estimates its cost of capital for the coming year to be 10 What are the reasonable cost of capital for an average risk project high risk and low risk?
In order to determine reasonable costs of capital for average, high and low risk projects the firm should develop risk-adjusted costs of capital for each category of risk based on the concept of divisional WACC. If a firm estimates that its cost of capital for the coming year will be 10%, the firm should use 10% as the basis for its average risk projects since the firm will need to achieve a minimum of a 10% return on all its projects. Typically, a high-risk project has the potential for higher returns and a low-risk project will typically yield lower returns. Therefore, the firm could set the cost of capital for its high-risk projects at 12% and the cost of capital for low risk projects at 8%. Since the average risk project has a 10% cost of capital, the overall risk of the firms projects will be equal to the 10% cost of capital. Similarly, if the firm's high-risk projects are particularly risky, they could be set at a 15% cost of capital and the low-risk projects will be adjusted down to a 5% cost of capital. The ultimate goal is that the portfolio of the firm's projects will achieve the required 10% return or greater so that the cost of capital to fund the projects is covered. The assignment of risk is somewhat subjective but it is better than not adjusting the risk at all.
Why the NPV of a relatively long term project is more sensitive to changes in the cost of capital than is the NPV of a short term project?
due to the uncertainty
Cost-benefit ratio in project?
cost benefit ratio is the ratio to be applied in finding of potentiality of project proposed to be implemented in terms of cost and the available materials ( eg.Land ) for th project which in turn equalizing the sources of capital applied and the resources or input achieved in terms of the ratio in the ascending equation:
What is the effect on IRR if cost of capital decreased?
A change in the cost of capital will not, typically, impact on the IRR. IRR is measure of the annualised effective interest rate, or discount rate, required for the net present values of a stream of cash flows to equal zero. The IRR will not be affected by the cost of capital; instead you should compare the IRR to the cost of capital when making investment decisions. If the IRR is higher than the cost of capital the project/investment should be viable (i.e. should have a positive net present value - NPV). If the IRR is lower than the cost of capital it should not be undertaken. So, whilst a higher cost of capital will not change the IRR it will lead to fewer investment decisions being acceptable when using IRR as the method of assessing those investment decisions.
Why do you use the overall cost of capital for investment decisions even when only one source of capital will be used?
The overall cost of capital is the cost of the opportunity to make a certain investment. A financial manager uses the overall cost of capital as a way to gauge the rate of return of one investment over another.
What are differences between project report and feasibility report?
A feasibility report is an investigation into whether a project is worth undertaking. The report looks at factors such as cost and time. A project report is exactly that - a report on a project which has been undertaken.
Why is WACC a more appropriate discount rate when doing capital budgeting?
WACC (Weighted Average Cost of Capital) is a more appropriate discount rate for capital budgeting because it reflects the overall cost of financing a project. It considers both the cost of debt and the cost of equity, taking into account the proportion of each in the capital structure. By using WACC as the discount rate, the project's cash flows are appropriately risk-adjusted and it helps in determining the economic viability of the investment.
Four main factors of production as applied to a typical project in the construction industry?
The four main factors of production as applied to a typical project in the construction industry include: · land as the capital cost of purchase · labour as the human resource to build the project, · capital as the finance required to invest in the project · entrepreneur as the owner of the company providing the inspiration to complete the project
