CORPORATE FINANCE - MODULE 6 MINICASE Essay Example | Topics and Well Written Essays - 2750 words

CORPORATE FINANCE - MODULE 6 MINICASE - Essay ExampleThis means that it generates enough silver to recover the toll of investment and the return that the investors want.If both franchise L and S are independent, wherefore both of them should be accepted as both of them have a positive NPV. On the opposite hand, if they are in return exclusive, then franchise S should be selected, as it gives a higher NPV value.(3) Would the NPVs channelise if the personify of capital agitated (Ehrhardt & Brigham, 2006)The NPV inversely depends on the cost of capital. Therefore, if NPV increases then the cost of capital decreases and, if the NPV decreases then the cost of capital increases.d. (1) Define the term internal rate of return (IRR). What is each franchises IRR (Ehrhardt & Brigham, 2006)The IRR is the discount rate at which NPV is equal to zero. Expressed as an equation, we haveIRR = $0 = NPV. 0 18.1% 1 2 3 -100.00 10 60 80 8.47 43.02 48.57 $ 0.06 $0Franchise Ls IRR is 18.1%. 0 23 .6% 1 2 3 -100.00 70 50 20 56.63 32.73 10.59 $ (0.05) $0Franchise Ss IRR is 23.6%(2) How is the IRR on a project related to the YTM on a stupefy (Ehrhardt & Brigham, 2006)As the YTM is the promised rate of return on a bond, the IRR is the expected rate of return on a project.(3) What is the logic behind the IRR method According... Independent projects are those whose cash flows are not touch by the acceptance of another project. On the other hand, mutually exclusive projects are those whose cash flows are affected by the acceptance of another project.The rationale behind the NPV method is that if NPV=$0, then the project breakevens in a financial sense (but not in the accounting sense). This means that it generates enough cash to recover the cost of investment and the return that the investors want.If both franchise L and S are independent, then both of them should be accepted as both of them have a positive NPV. On the other hand, if they are mutually exclusive, then franchis e S should be selected, as it gives a higher NPV value.IRR measures a projects profitability in the rate of return sense if a projects IRR equals its cost of capital, then its cash flows are just fitted to provide investors with their required rates of return. An IRR greater than r implies an stinting profit, which accrues to the firms shareholders, while an IRR less than r indicates an economic loss, or a project that will not earn enough to cover its cost of capital.No, the IRR wouldnt be affected by a change in the cost of capital. It should be noted, however, that the acceptability of the IRR may change if the cost of capital changes. For example, franchise L would be rejected if the cost of capital increases beyond 18.1%.(2)