Thecorrectway to solve this problem would be to choose the projects starting from the highest profitability index until cash is depleted: Projects B, A, F, E, and D. This would yield an NPV of $545,000. Disadvantages of the Profitability Index The profitability index requires an estimate of...
To calculate the profitability index, you first need to determine the present value of the expected futurecash flowsfrom the investment. This involves discounting the future cash flows back to their present value using an appropriate discount rate, which often reflects the cost of capital or the r...
What is the composite cost of capital? Explain the process to compute it. What is the primary determinants on an investment's cost of capital? 1. Describe the concept of NPVGO, and how this can create measurable value. Explain the Terminal ...
Another method for adjusting returns for cash flows is theinternal rate of return(IRR), a discount rate that makes the net present value of all cash flows zero. Using a financial calculator or spreadsheet software, you can quickly compute the IRR, which gives you an effective means for ...
There are some downfalls to using this metric, however, despite the IRR being easy to compute with either a financial calculator or software packages. Like the payback method, the IRR doesn't give a true sense of the value that a project will add to a firm. It simply provides a benchmar...
In cellI5, compute theNegative Cash Flow (Years)as follows: =COUNTIF(E6:E15,"<0") In cellI6, calculate theLast Negative Cash Flowvalue with the formula below: =VLOOKUP(I5,B5:E15,4) Determine thePresent Value of Cash Flowfor the next year with this formula: ...
You compute the value of the penalty by multiplying the replacement cost ($500,000) with the multiplier, 0.25 (1 – 0.75). So by violating the coinsurance clause, you are not only unable to receive the full replacement cost, but you also have to pay a hefty penalty. ...
You compute the value of the penalty by multiplying the replacement cost ($500,000) with the multiplier, 0.25 (1 – 0.75). So by violating the coinsurance clause, you are not only unable to receive the full replacement cost, but you also have to pay a hefty penalty. Conclusion Coinsurance...
On the one hand, increased future uncertainty reduces enterprises’ profitability, reducing their financing ability and pushing up their borrowing costs, creating a disincentive for enterprises’ investment decisions [39]. On the other hand, increased policy uncertainty leads banks to reduce credit ...
While the mathematics behind these models can be complex, investors don't need to do the calculations manually. Many trading platforms and online tools can quickly compute option prices based on them. While theBlack-Scholesmodel remains the foundation of options pricing, there's a trend toward ev...