Capital Rationing Using the Payback and Net Present Value Methods

Related BrainMass Solutions

• Payback and Net Present Value Methods for Dino Corporation

  125388 Unifying Concepts: Capital Rationing Using the Payback and Net Present Value Methods for Dino Corporation Dino Corporation is trying to decide which of five investments opportunities it should undertake. The company's cost of capital is 16%.

• Screening Capital Projects

  Cash payback method and average rate of return method b. Average rate of return method and net present value method c. Net present value method and cash payback method d. Internal rate of return and net present value methods. c.

• Dino Corporation

  Using the net present value method, determine which of the remaining projects the company should undertake, keeping in mind the capital rationing constraint.

• The Profitability Index And Capital Rationing

  Payback period ignores the timer value of money, so it will not work either. Net present value incorporates the time value of money and the company's cost of capital; however, it does not account for the limited resources available for investment.

• Benefit cost ratio for each alternative

  Lower payback period is desirable. NPV Net Present value gives the value addition by the project.

• Capital budgeting and estimating cash flows

  - When comparing mutually exclusive projects, it cannot give the value maximizing project - When there is capital rationing, the method cannot give the value maximizing project Payback methods Pros: - It is a simple method to use and understand

• Project's payback period;net present value

  It shows how to calculate the net present value, profitability index, internal rate of return.

• Pay back period, NPV,IRR

  incase of capital rationing,NPV and IRR needs to be applied.In case of NPV Project D is to be selected and in case of IRR project A can be selected The solution contains the computation of pay back period, net present value, Internal rate of return,

• Can a company's assumptions about its projects cause it to misallocate funds? Explain. Does capital rationing impact maximization of shareholder wealth? Explain.

  If the project is undertaken and it turns out that it has a higher risk than anticipated, this might cause the project to have a negative net present value.