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Essay / Research Paper Abstract
This 3 page paper looks at a case study supplied by the student and assesses the potential of an investment by using the net present value (NPV), internal rate of return (IRR) and payback period.
Page Count:
3 pages (~225 words per page)
File: TS14_TErondo5.rtf
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Unformatted sample text from the term paper:
a period of five years. The student has given a case with a set of gurus in and the most appropriate way to measure the potential of this project is
to use NPV and IRR. The net present value takes the future cash flow of the company and discounts it into todays terms. We are given the gross and EBIT
cash flow and the tax rate; we are also given the investment amount. However, we have not been given the discount factor. This needs to be calculated. The most appropriate
way of discounting this is to use the cost of capital, as however this is funded it will require a capital investment. To calculate the WACC we need to
look at the cost of debt and the cost of equity. The cost of equality is the dividends Figure 1 Cost of equity Amount Proportion of capital
Rate Proportional rate Equity 30,960,000 0.67 4.88% 3.29% Bank loan 10,000,000 0.22 6% 1.31% Mortgage 5,000,000 0.11 7.50% 0.82% Total 45,960,000 5.41% Now we have this we know
the rte of discount to apply. Next we need to look at the case flow, WE have been told the EBIT is 2,000,000 a year and as projects are considered
prior to tax this is the figure we will use. Figure 2 Net Present Value Year Profit discount rate discounted cash flow Accumulative total Year 1 2,000,000 0.94688003 1,893,760
1,893,760 Year 2 2,000,000 0.89828292 1,796,566 3,690,326 Year 3 2,000,000 0.85217999 1,704,360 5,394,686 Year 4 2,000,000 0.80844321 1,616,886 7,011,572 Year 5 2,000,000 0.76695115 1,533,902 8,545,475 End value 0 0.72758861 0
8,545,475 Less initial investment 6,250,000 NPV 2,295,475 Now to look at the internal rate of return (IRR) we need to perform a negative NPV, for
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