Corporate Finance assignment on capital budgeting techniques and Essay

Corporate Finance assignment on capital budgeting techniques and required rate of return estimation - Essay Example For projects that are considered as mutually exclusive, that project that reflects the higher NPV, which has been applied in this case is the most appropriate to pick. The assumption under NPV is that cash inflows after every period are usually reinvested. It calculates the absolute proportionality of two projects. (Heitger, 2007 p525) Therefore, it is going to be applied in this study. Managers are in a position to make an evaluation of a project cash flow. One of the renown methods of projects’ analysis and choice is NPV; NPV= Present Value cash inflows – Present Value cash outflows. If the result is positive, then it gives a go ahead to take up the project. (Harvey, 1995) In this case presented below, there is no project with a positive NPV and thus rationality call for the avoidance of both. However, if the company has to undertake a project, then it should undertake Titan project since it has the higher NPV. Figure 1: PROJECT TITAN PROJECT TITAN Year 0 1 2 3 4 5 6 EXPENSES initial costs 48000000 0 0 0 0 0 0 infrastructure costs 15000000 0 0 0 0 0 0 depreciation equipment 0 7200000 7200000 7200000 7200000 7200000 7200000 working capital 0 5500000 6050000 6655000 7320500 8052550 8857805 operation expenses 0 16000000 17120000 18318400 19600688 20972736 22440828 Royalties 0 0 2200000 2464000 2759680 3090842 3461743 interest on loan 0 4178351 3572568 2908313 2179941 1381263 505494 TOTAL OUTFLOWS 63000000 32878351 36142568 37545713 39060809 40697391 42465870 REVENUES 0 0 44000000 49280000 55193600 61816832 69234852 NET CASH INFLOWS BEFORE TAX 63000000 32878351 7857432 11734287 16132791 21119441 26768982 TAX ON NET REVENUE 0 0 2357230 3520286 4839837 6335832 8030695 NET CASH INFLOWS -63000000 -32878351 5500202 8214001 11292954 14783609 18738287 PRESENT VALUE (17%) 1 0.8547 0.7305 0.6244 0.5337 0.4561 0.3898 -63000000 -28101126.6 4017897.561 5128822.224 6027049.55 6742804.065 7304184.273 NPV= -61880368.93 PROJECT OLYMPUS PROJECT OLYMPUS YEAR 0 1 2 3 4 5 6 7 8 EXPENSES initial costs 66000000 0 0 0 0 0 0 0 0 infrastracture costs 20000000 0 0 0 0 0 0 0 0 depreciation equipment 0 9900000 9900000 9900000 9900000 9900000 9900000 6600000 0 working capital 0 14000000 12880000 11849600 10901632 10029501 9227141 8488970 7809852 operation expenses 0 31000000 32240000 33529600 34870784 36265615 37716240 39224890 40793885 Royalties 0 0 2725000 3079250 3479553 3931894 4403722 4976205 5623112 interest on loan 0 5668303 5116727 4513708 3854450 3133706 2345743 1484291 542497 Lease costs 0 3000000 3000000 3000000 3000000 3000000 3000000 3000000 3000000 TOTAL OUTFLOWS 86000000 63568303 65861727 65872158 66006419 66260716 66592846 63774356 57769346 REVENUES 0 0 54500000 61585000 69591050 78637887 88074433 99524109 112462243 NET CASH INFLOWS BEFORE TAX -86000000 63568303 -11361727 -4287158 3584631 12377171 21481587 35749753 54692897 TAX ON NET REVENUE 0 0 0 0 1075389.3 3713151.3 6444476.1 10724925.9 16407869.1 NET CASH INFLOWS -86000000 -63568303 - 11361727 -4287158 2509241.7 8664019.7 15037110.9 25024827.1 38285027.9 PRESENT VALUE (17%) 1 0.8547 0.7305 0.6244 0.5337 0.4561 0.3898 0.3332 0.2848 -86000000 -54331828.57 -8299741.574 -2676901.455 1339182.295 3951659.385 5861465.829 8338272.39 10903575.95 NPV= -118237414.3 PART 2 Beta shows the relationship existing between the premium rate of the market and a firm’s rate of return. Beta is the value reflecting the slope when these two components mentioned are graphed. The process of finding beta is to be explained as