Cash Flows (in thousands of USD) Year 0 1 2 3 4 5 6 7 Project 1 -100 10 20 0 0 1
ID: 2774230 • Letter: C
Question
Cash Flows (in thousands of USD)
Year
0
1
2
3
4
5
6
7
Project 1
-100
10
20
0
0
110
0
0
Project 2
-100
0
0
0
40
50
80
10
Project 3
-250
0
15
20
30
40
150
110
Project 4
-500
150
150
-100
50
100
150
200
Project 5
-400
100
100
-100
200
200
-80
130
In the above table, five projects were proposed from different departments of the firm trying to compete for the total $1,000,000 capital budget for next year. The CFO made it clear at the meeting that any project with zero or negative NPV should not be funded. Given it is a pharmaceutical firm, the CFO and the key managers are used to concepts of investing in the long-term projects and/or relatively risky projects, and/or projects with volatile cash flows over time. In addition, most of the members on the committee are cautiously optimistic about the future outlook of the economy. Around the time of the meetings, there were rumors that the Federal Reserve Bank is considering increasing the prime interest rates.
1) So far in your analysis, have some other benchmarks (such as Payback Period, MIRR, Return to Investment) affected your decisions yet? Which parameter(s) is particularly important in this case?
Cash Flows (in thousands of USD)
Year
0
1
2
3
4
5
6
7
Project 1
-100
10
20
0
0
110
0
0
Project 2
-100
0
0
0
40
50
80
10
Project 3
-250
0
15
20
30
40
150
110
Project 4
-500
150
150
-100
50
100
150
200
Project 5
-400
100
100
-100
200
200
-80
130
Explanation / Answer
Net present value is the financial measure to verify the profitability of the project.
But in addition to NPV, other benchmarks also necessary such as:
Pay back period:
It measures how much time is taken to get back the invested amount
MIRR:
It is the rate of return which the company shall earn to satisfy the stakeholders.
Return on inestment:
It is the maximum that the company can earn.
But, everything goes well, NPV is the best measure.
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