To get a better idea of what a decent or acceptable ROIC is, you can compare companies operating in the same sector. If a company consistently delivers higher ROIC than its peer group, it generally means it is better run and more profitable. In the case of mature, established companies, c...
Regardless, an IRR that’s significantly higher than a company’s weighted average cost of capital (WACC) and/or hurdle rate is an indicator of favorable outcomes. Another output of DCF analysis is net present value, a simple, straightforward measure of project value. The greater the NPV, ...
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Why is a higher NPV conceptually better than a lower one? Define or describe the NPV and IRR methods. What is the difference between NPV, IRR, Payback analysis, and how are these methods related? Why is NPV important to a project?
Cost of Capital: The capital structure affects the company’s weighted average cost of capital (WACC), which is the weighted average cost of debt and equity financing. A higher proportion of debt typically results in a lower WACC, as debt is usually cheaper than equity. A lower WACC can ma...
Accounting Rate of Return Method (ARR): ARR expresses the rate of return as a percentage of the project’s earnings. Projects with ARR higher than a predetermined rate are accepted. ARR considers the entire economic life of a project and net earnings. But it overlooks the time value of mone...
Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain. What are the drawbacks of profit maximization?
Needs, A Identifying Funding
a company may evaluate an investment in a new plant versus expanding an existing plant based on the IRR of each project. The higher the IRR the better the expected performance of the project and the more return the project can bring to the company. ...
Whether a weighted average is better depends on the specific context and the objectives of your analysis. Weighted averages are better when different data points have varying degrees of importance, allowing you to have a more nuanced representation of the data. However, they may introduce subjectivi...