Managing Projects College Essay Example | Topics and Well Written Essays - 2000 words

Managing Projects College - Essay Example Calculation of WACC is not a simple task as many would think, this is because the only part which is simple is calculation of the debt a firm has, these debt include the bank loan and other borrowing, however this is usually the beginning of the hard task since it known that the equity finance is usually more expensive than cost debt finance, this is due to the fact that equity finance has complex computation of the risk premium making computation of WACC complex. This computation of WACC is made more complex when determining which debts or equity should be used to increase the returns on capital of the share holders. The inclusion of corporate tax- rate in this computation adds more trouble while calculating WACC in view of the fact that interest payment is taxable. From the above facts, I would not agree with the statement that calculation of the WACC is the easiest thing in the world because even though the formulae appears simple it cannot be interpreted in lay mans language, e.g. the total finance includes all the trade credits and current liabilities which are reflected in the balance sheet of a company, but for the accountants who calculate the investments alternatives and evaluate critically the account of a company whose objective is to maximize the investment returns, it may not be a hard thing. But I would conclude by disagreeing with the statement. Q2. Determining the replacement of maximus limited machinery using equivalent annual cost: year capital investment running cost scrap value gross value present value factor present value 1 9999 0 9999 9999 1 9999 0 2985 5040 2055 0.909091 1868.182 present value 11867.18 2 9999 0 9999 9999 1 9999 0 4015 3100 -915 0.909091 -831.818 0 4015 3100 -915 0.826446 -756.198 present value 8410.983 3 9999 0 9999 9999 1 9999 0 8970 1080 -7890 0.909091 -7172.73 0 8970 1080 -7890 0.826446 -6520.66 0 8970 1080 -7890 0.751315 -5927.87 present value -9622.26 From the above calculations the machines should be replaced on the third year, this is because the net present value of the machine in the third year is negative (-9622.26) as compared to the other years where the net present value is positive. A negative present value means that the machine has negative value. This is a good measure of investment because it considers the time value of money and particularly useful for selection of a mutually exclusive investment and instrumental in achieving the objective of financial management, however one major factor that needs to be considered while selecting the better investment project is that, this is an absolute measure in that it favors the investment with higher NPV but it is likely that this project has a higher investment cost therefore, its doesn't give best results. Another factor to be considered is the whether the machines have different lives. 3. MARKET EFFICIENCY AND SHAREHOLDER WEALTH MAXIMISATION ARE TWO SIDE OF THE SAME COIN. Market efficiencies is defined as a market in which all the participants have all the information in the market, that is, all buyer and seller have know the prices concerning all the products whereas