Fin 534 Discussion Question
November 22, 2016
Fin 534 Discussion Question in $4 Only (Instant Download)
E-Activity: Use the Internet to research two (2) mutually exclusive investment projects to compare. The projects may involve any kind of investment, as long as the time frame for one (1) of the investments is a maximum of one (1) year (short term) and the time frame for the other investment is five (5) years minimum (long term). Be prepared to discuss.
Capital Budgeting and Risk Analysis” Please respond to the following:
* From the e-Activity, analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2).
* From the scenario, take a position for or against TFC’s decision to expand to the West Coast. Provide a rationale for your response in which you cite at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive at your decision.
Sample Answer:
…..The time value of money of tomorrow’s money is not equivalent to today’s value short-term projects may be more favorable. The NPV assumes the appropriate reinvestment rate of the cost of capital. Changes in the costs directly affect the IRR. You do not want to take on a project that returns less money than you pay to borrow the money (cost capital)……
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