What are the most critical problems that arise in calculating a rate of return for an...
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What are the most critical problems that arise in calculating a rate of return for an investment? 10.A firm has an opportunity to invest in a machine at a cost of Br 656,670. The net cash flows after taxes from the machine would be Br 210,000 per year and would continue for five years. The applicable cost of capital for this project is 12%. Calculate the NPV for the investment. Should the investment be made? 11. Why should we be concerned with risk in capital budgeting? Is the standard deviation an adequate measure of risk? Can you think of a better measure? 12.If project XYZ has an expected net present value of Br 20,000 and a standard deviation of Br 4,000, is it more risky than project RST, whose expected value is Br 14,000 and standard deviation is Br 3,000? Explain. 13.LIMAT Share Company can invest in one of the two mutually exclusive, one- year projects requiring equal initial outlays. The two proposals have the following discrete probability distributions of net cash inflows for the first year: Project A P CF P 0.2 2000 0.1 0.3 4000 0.4 0.3 6000 0.4 6000 0.2 8000 0.1 8000 Project B CF 2000 4000 Without calculating a mean and a coefficient of variation, can you select the better proposal? Verify your intuitive determination. What are the most critical problems that arise in calculating a rate of return for an investment? 10.A firm has an opportunity to invest in a machine at a cost of Br 656,670. The net cash flows after taxes from the machine would be Br 210,000 per year and would continue for five years. The applicable cost of capital for this project is 12%. Calculate the NPV for the investment. Should the investment be made? 11. Why should we be concerned with risk in capital budgeting? Is the standard deviation an adequate measure of risk? Can you think of a better measure? 12.If project XYZ has an expected net present value of Br 20,000 and a standard deviation of Br 4,000, is it more risky than project RST, whose expected value is Br 14,000 and standard deviation is Br 3,000? Explain. 13.LIMAT Share Company can invest in one of the two mutually exclusive, one- year projects requiring equal initial outlays. The two proposals have the following discrete probability distributions of net cash inflows for the first year: Project A P CF P 0.2 2000 0.1 0.3 4000 0.4 0.3 6000 0.4 6000 0.2 8000 0.1 8000 Project B CF 2000 4000 Without calculating a mean and a coefficient of variation, can you select the better proposal? Verify your intuitive determination.
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1 The most critical problems that arise in calculating a rate of return for an investment are Difficulty in estimating future cash flows accurately In... View the full answer
Related Book For
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil
Posted Date:
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