Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Year Project I Project II 0 $(100,000) $(100,000) 1 — 63,857 2 134,560 63,857 Skiba's cost of capital is 10%. Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent. NPV IRR Project I $fill in the blank 1 fill in the blank 2 % Project II $fill in the blank 3 fill in the blank 4 %
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow:
| Year | Project I | Project II | ||
| 0 | $(100,000) | $(100,000) | ||
| 1 | — | 63,857 | ||
| 2 | 134,560 | 63,857 |
Skiba's cost of capital is 10%.
Required:
1. Compute the NPV and the IRR for each investment. Round
| NPV | IRR | |
| Project I | $fill in the blank 1 | fill in the blank 2 % |
| Project II | $fill in the blank 3 | fill in the blank 4 % |
2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba.
NPV is an absolute profitability measure and reveals how much the value of the firm will change for each project. IRR gives a measure of relative profitability . Thus, since NPV reveals the total wealth change attributable to each project, it is preferred to the IRR measure.
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