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Capital Budgeting Finance

1. Describe some situations where the weighted-average cost of capital (WACC) would be an inappropriate discount rate in the NPV calculation.?

2. What are some of the pitfalls in forecasting cash flow for a project?

3. How do you compensate for risk in the NPV calculation

4. What are some methods for hedging exchange rate risk?

5. What is the difference between book value and market value? Which is more relevant in financial analysis?

Solution Preview

1. Describe some situations where the weighted-average cost of capital (WACC) would be an inappropriate discount rate in the NPV calculation.?

In the following situations WACC may not be appropriate
1. Different risk profile of the project from the firm.
2. Project has rapidly changing leverage.
3. WACC ignores imbedded optionality in projects which have options

2. What are some of the pitfalls in forecasting cash flow for a project?

The pitfalls in ...

Solution Summary

The solution explains various concepts relating to capital budgeting, exchange risk, book value and market value.

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