Purchase Solution

Valuation Capital Budgeting

Not what you're looking for?

Ask Custom Question

Please see the attached information.

Purchase this Solution

Solution Summary

The solution has three problems relating to capital budgeting - IRR and NPV calculation and real options

Solution Preview

Please see the attached file.

The better project is one which has a higher NPV. We first calculate the NPV of the projects.
NPV = PV of cash inflows - initial investment
Project S
NPV = -1,000 + 900/1.1 + 250/1.1^2 + 10/1.1^3 + 10/1.1^4
NPV = $39.14
Project L
NPV = -1,000 + 0/1.1 + 250/1.1^2 + 400/1.1^3 + 800/1.1^4
NPV = $53.55
The better project us Project L. Using the IRR function in excel, the IRR of Project L is 11.74%

Real options relate to being able to abandon or delay the project. Real options lead to an increase in cost because the companies would need to make agreements with the suppliers/contractors which would have an abandonment/changes clause. Since this would increase the risk of suppliers/contractors there would be cost attached to having real options. The suppliers/contractors ...

Purchase this Solution


Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.