# Corporate Finance Essay

4890 WordsFeb 27, 201320 Pages
Table of Contents Corporate Finance Strategy - (CFS Written Course Work Assignment) 4 Part A: Investment Appraisal 4 Project First Versus Project Second 4 (a) Payback Period 4 (b) Accounting Rate of Return (ARR) 5 (c) Net Present Value 6 (d) Internal Rate of Return 7 Summary of Results: 7 Comparison of Rankings: 8 Definitions 8 Payback Period (PP) 8 Accounting Rate of Return (ARR) 8 Net Present Value (NPV) 8 Internal Rate of Return (IRR) 9 Advantages and Disadvantages of Budgeting Techniques 9 Popularity of Investment Appraisal Techniques 10 Weighted Average Cost of Capital (WACC) 12 Calculating WACC 14 Part B: Dividend Policy 14 Conclusion 16 References: 17 APPENDIX 1 18 Corporate Finance Strategy - (CFS Written Course Work Assignment) Part A: Investment Appraisal Project First Versus Project Second The expected cash flows for the two projects are given below. The cost of capital is to be taken as 10%. Cash Flows over 5 years | Project First (€) | Project Second (€) | Year 0 | (30,000) | (30,000) | Year 1 | 3,000 | 23,000 | Year 2 | 12,000 | 15,000 | Year 3 | 18,000 | 14,000 | Year 4 | 22,000 | 10,000 | Year 5 | 25,000 | 4,000 | Calculate the: (a) payback period, (b) accounting rate of return, (c) internal rate of return and (d) net present value (a) Payback Period Step 1 - Draw up tables with the cash flows and cumulative cash flows. Cash inflows are to be added up in the cumulative cash flow column. Additions may halt once the cumulative values are equal or greater than the original investment at year 0. | Project 1 (€) | Cumulative (€) | Year 0 | -30,000 | | Year 1 | 3,000 | 3000 | Year 2 | 12,000 | 15000 | Year 3 | 18,000 | 33000 | Year 4 | 22,000 | | Year 5 | 25,000 | | | Project 2 (€) | Cumulative