ACCT346 Capital Budgeting Techniques

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ACCT346 Capital Budgeting Techniques
Suppose a company has five different capital budgeting projects fr…

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ACCT346 Capital Budgeting Techniques

ACCT346 Capital Budgeting Techniques

Discussions Week 5 All Students Post 49 Pages

Suppose a company has five different capital budgeting projects from which to choose but has constrained funds and cannot implement all of the projects. Explain why comparing the projects’ NPVs is better than comparing their IRRs. How is the IRR determined if there are uneven cash flows? Why does the failure to consider soft benefits discourage investment?

Firstly, what is the time value approach to capital budgeting? Give an example of how it would work in the following case:
Assume you are thinking about investing $1000, and that the investment will return to you $1400 (once) five years in the future: Assume you have a 10% Required rate of return. WOULD YOU MAKE THE INVESTMENT?
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Problem #1:
Recently on the Golf Channel there was a film report of a person hitting a hole-in-one and winning $1 million. He went crazy in the film. HOWEVER, it was $50,000 every year paid out over the next 20 years. He wasn’t offered the lump sum.
Questions: A) If the money is valued at 14% what was the REAL PRESENT VALUE of his winnings? (What was it worth that day?) Explain your answer. If you use a TABLE be careful which Table you are using. This is an annuity. NOT a payment once.
(Make sure your answer is logical. Remember he is receiving $50,000 per year. The answer cannot be more than $1,000,000 and it cannot be less than $150,000 just based on logic.)
B) If the money is valued at 6% what was the REAL PRESENT VALUE of his winnings? (What was it worth that day?) Explain your answer.
C) Note that the rule is that the higher the interest rate the Lower the Present Value and the lower the interest rate the Higher the Present Value. (As you should see from your answers to parts A and B) Can you explain why this rule is true?…