Capital Financing and Allocation - Weighted Average Cost Capital
11 important questions on Capital Financing and Allocation - Weighted Average Cost Capital
What is the separation principle?
- NPV >= 0 at the WACC/MARR;
- IRR >= WACC/MARR;
Value creation for the investors
Say something about WACC and risk considering |
- Businesses with average risk;
- Businesses with high risk;
and no significant capital limitations, WACC is an appropriate hurdle;
Bussiness with high risk
Use a higher discount rate (WACC) (using WACC from similar projects);
Give different WACC risk classes and corresponding projects;
- New products;
- Acquisitions;
- Joint ventures;
- Capacity expansion to meet forecasted sales;
- Cost improvement projects;
- Replacement;
- Capacity increase to meet existing orders;
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What is the definition of joint ventures?
Assumption | Projects are not mutually exclusive
What are possible classifications for investment proposals?
- Kinds and amounts of scarce resources used;
- According to whether the investment is tactical or strategic
- According to the business activity involved | Marketing, Production, Warehousing;
- According to priority | Essential, necessary, economically, desirable;
- According to the type of benefits expected to be received | Increased profitability, reduced risk;
- Involvement facility replacement, expansion or product improvement;
- The way benefits from the proposed project are affected by other proposed projects;
What does a tactical investment constitute?
What does strategic investment constitute?
What is very important in capital investment proposals? [3]
- Bases and assumptions used for estimation;
- Level of confidence does the proposer have regarding these estimates;
- How can the investment outcome be affected by variations in these estimated values;
What is the postmortem review?
- For what [3] reasons is it important?
- Have planned objectives been obtained;
- Is corrective action required;
- Improves estimating and future planning;
What is meant with project A is a prerequisite for project B?
What is meant with project A being a substitute for project B?
The question on the page originate from the summary of the following study material:
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- Never study anything twice again
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- 100% sure, 100% understanding
