Taking/Rejecting a Project Based on NPV

Related BrainMass Solutions

• Usage of WACC

  The company may end up accepting the project based on the high NPV when it should be rejecting it. In the same way, if the average WACC is used for a low risk project, then the NPV may be underestimated.

• What would happen to the firm's risk if it chose all projects bsaed on a single discount rate (WACC)?

  396340 Firm's risk if it chose all projects based on a single discount If a firm uses a single discount rate, their WACC, to compute the NPV of all capital projects, even though they have a wide range of non-diversifiable risk.

• The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in...

  This may result in: A. firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV. B. never considering capital budgeting projects on their own merits.

• Discount rate;investment with the cash flow

  Since NPV of project A is higher, project A should be selected. Discount Rate 10% NPV $(4,526.67) $4,270.47 Project A has negative NPV and does not qualify for selection.

• Reworking the NPV for a Project Optimistically and Pessimistically

  Based on the values in the table above, members of the committee have calculated a NPV of -$130,000. They are talking about rejecting the project. You, however, wonder if this is correct.

• Evaluation of investment

  Based on the values in the table above, members of the committee have calculated a NPV of -$130,000. They are talking about rejecting the project. I, however, wonder if this is correct.

• WACC

  The solution explains the decision rule for accepting/rejecting projects based on WACC

• Project Costs: IRR, NPV, Profitability Index, Investments

  Final decision - based on the NPV since it does not have the ranking problem associated with the other capital budgeting techniques, thus accept project A. The project cost for firm evaluations are given. The required rate for a firm are given.

• investment project

  NPV and IRR results can also be distorted in our scenario because the appropriate discount rate based on the riskiness of the project in high technology industry may be very difficult to chose.