The paper "Investment Performance Measurements" is a wonderful example of an assignment on finance and accounting. Company Equity market value Beta ABC 2billion 1.50 XYZ 1billion 1.30 New capital structure 2billion 2.80 The net worth of the company will remain two billion since one billion dollars will be used to acquire XYZ Question one (b) Company Equity market value Beta ABC 2billion 1.50 XYZ 1billion 1.30 Debt equity 1billion New capital structure 3billion 2.80 There will be a creation of debt capital of one billion dollars whereas the other two billion will remain intact (Alberts & Segall, 2003). Question one (c) The cost of equity before acquisition 60% of 1,000,000 = 600M The cost of equity after acquisition: 65% of 1,000,000,000 = 650M With debt: 600m × 2 = 1.2 Billion dollars 650m × 2 = 1.3billion dollars Question Two Machine A Investment cost-$500 Expected lifetime-3 years Annual maintenance -$120 Machine B Investment cost-$600 Expected lifetime-4 years Annual maintenance -$100 Assuming that the cost of capital is 10% Machine A – 500/A3, 10 = 500/2.48685 = 201.1 Machine B – 600/A4, 10 = 600/3.16987 = 189.28 The club should choose machine B since it has a lower EAC (Graham & Harvey, 2001). Question Three Net Present Value Space Plane NPV = 1000000/ (1.1)1 +1000000/ (1.1)2-1000, 000 Space Plane NPV = (909090.91+826446.28)-1000, 000 = 735,537.19 Space Plane project is acceptable since its NPV is greater than 1 Mars Shuttle NPV =1,000,000/ (1.1)1 + 1,000,000/ (1.1)2 + 1,000,000/ (1.1)3 – 2,000,000 Mars Shuttle NPV = 909090.91+826446.28+75314.80) - 2,000,000 Mars Shuttle NPV = 1,810,851.99-2,000,000 = -189,148.01 Mars Shuttle project should be rejected because its NPV is less than one Venus Satellite NPV = 4,000,000/ (1.1)1-3000, 000 Venus Satellite NPV = 3636363.63-3,000,000 = 636,363.63 Venus Satellite project is acceptable since its NPV is greater than one Moon Plant NPV = 900,000/ (1.1)1+900,000/ (1.1)2+900,000(1.1)3-1,500,000 Moon Plant NPV = (818,181.82+743,801.65+676,183.32)-1,500,000 Moon Plant NPV = 2,238,166.79-1,500,000 = 738,166.79 Moon Plant project should be acceptable since its NPV is greater than one (Schafrick, 2003). Project NPV Rank Moon Plant 738,166.79 1 Space Plane 735,537.19 2 Venus Satellite 636,363.63 3 Internal Rate of Return Space Plane IRR 0 = -1,000,000 + 1,000,000/ (1+IRR) 1+1,000,000/ (1+IRR) 2 = 0.10 = 10% Mars Shuttle IRR 0 = -2,000,000+ 1,000,000/ (1+IRR) 1+1,000,000/ (1+IRR) 2+1,000,000/ (1+IRR) 3 =0.0235 = 2.35% The project should be rejected because its IRR is lower than the required rate of return Venus shuttle IRR 0 = -3,000,000+4,000,000/(1+IRR)1 IRR = 0.333 =33.3% The projected should be accepted because its IRR is more than the required rate of return (Quiry et al, 2011). Moon Plant IRR 0 = -1,500,000+900,000/(1+IRR)1+900,000/(1+IRR)2+900,000/(1+IRR)3 0.3446 = 34.5% The project should be accepted since its IRR is greater than the required rate return (Hirschey, 2008). Payback period Space Plane Payback period = 1,000,000÷ 1,000,000 = 1 Year Mars Shuttle Payback period = 2,000,000÷ 1,000,000= 2 years Venus shuttle Payback period = 3,000,000÷ 4,000,000 =0.75 years (9months) Moon Plant Payback period = 1,500,000÷ 900,000 = 1.67Years (1 year, 8moths) (Greenwood, 2002). Project Payback period Rank Venus Satellite 9 months 1 Space Plane 1 year 2 Moon Plant 1 year 8 months 3 Mars Shuttle 2 years 4 Profitability Index Profitability Index = (NPV + Initial investment)/Initial investment Space Plane PI = (735,537.19+1,000,000) /1,000,000 Space Plane PI = 1.74 The project should be accepted since PI is greater than one Mars shuttle PI = (-189,148.01+2,000,000)/2,000,000 Mars shuttle PI = 0.91 The project has to be rejected because PI is less than one Venus Satellite PI = (636,363.63+3,000,000)/ 3,000,000 Venus Satellite PI = 1.21 Moon Plant PI = (738,166.79+1,500,000)/1,500,000 Moon Plant PI = 1.49 Project PI Rank Space Plane 1.74 1 Moon Plant 1.49 2 Venus Satellite 1.21 3 Differences in acceptability and ranking NPV and Profitability index both reject Mars Shuttle as a project since it does give a negative NPV and a profitability index of less than one.
Using the payback period Mars Shuttle is ranked last. All projects indicate that Mars shuttle is not a viable or feasible project that Johnson Spacecraft have to avoid at all cost. Moon Plant project is ranked first using NPV, second using PI, and third using the payback period.
The internal rate of return gives similar results as the payback period and NPV since they have rejected Mars Shuttle as a project (Feibel, 2003). The differences in ranking of the projects happen with regard to what is considered in the calculations. NPV and PI have almost the same ranking since PI involves the use of NPV in its calculation. Differences in ranking depend on what is factored in during the calculation of the present value or the internal rate of return.
Alberts, W.W., & Segall, J.E. (2003). Corporate Merger, Beard Books: Melbourne, retrieved from http://books.google.co.ke/books?id=f0nGD2zINegC&printsec=frontcover&dq=Corporate+Merger,+Beard+Books:&hl=sw&sa=X&ei=qLkIUv7IJeTH0QX-_YFY&ved=0CCsQ6AEwAA#v=onepage&q=Corporate%20Merger%2C%20Beard%20Books%3A&f=false on 10th August, 2013.
Feibel, B. J., (2003). Investment Performance Measurement, New York: Wiley, retrieved from: http://books.google.co.ke/books?id=fzAVZvAGP7cC&printsec=frontcover&dq=Investment+Performance+Measurement&hl=sw&sa=X&ei=VLoIUuq_LqOx0QXxyoGQBQ&ved=0CCsQ6AEwAA on 10th August, 2013.
Greenwood, R.P. (2002). Handbook of Financial Planning and Control, Ottawa: Gower Publishing, Ltd, retrieved from: http://books.google.co.ke/books?id=bA4hPiZVUH0C&printsec=frontcover&dq=Handbook+of+Financial+Planning+and+Control&hl=sw&sa=X&ei=wssIUrztOMiWtQbu3YGQDg&ved=0CCsQ6AEwAA#v=onepage&q=Handbook%20of%20Financial%20Planning%20and%20Control&f=false on 10th August, 2013.
Graham, J.R., & Harvey, C.R., 2001, The theory and practice of corporate finance: Evidence from the field, 60: 1-25.
Hirschey, M. (2008). Managerial Economics, London: Cengage Learning, retrieved: http://books.google.co.ke/books?id=igRaLAYvaCgC&pg=PR27&dq=Hirschey,+M.+(2008).+Managerial+Economics&hl=sw&sa=X&ei=9cwIUtnAD4jQsgahi4DQCg&ved=0CHMQ6AEwCQ#v=onepage&q=Hirschey%2C%20M.%20(2008).%20Managerial%20Economics&f=false on 10th August, 2013.
Quiry, P., Salvi, A., Dallochio, M., & Vernimmen, P. (2011). Corporate Finance: Theory and Practice, New York: John Wiley & Sons, retrieved: http://books.google.co.ke/books?id=qxGVf9I0UXoC&printsec=frontcover&dq=Corporate+Finance:+Theory+and+Practice&hl=sw&sa=X&ei=080IUuaTA9HLtAbK34DQCQ&ved=0CCsQ6AEwAA#v=onepage&q=Corporate%20Finance%3A%20Theory%20and%20Practice&f=false on 10th August, 2013.
Schafrick, I. C., (2003). Analyzing multiple internal rates of return, Theses and Dissertations, Paper 804.