Investment Appraisal Project Essay Example | Topics and Well Written Essays - 2000 words

Investment Appraisal Project - Essay ExampleWACC=wdkd(1-T)+wpkp+wsks Where Kd = care on debt Kp = cost of preference shares Ks = cost of shares and retained earnings. WACC is calculated by multiplying the cost of equity by the market place value of the equity and cost of debt by the market value of the debt. address of equity keister be defined as the minimum rate of return that a lodge must hold and offer to their investors in order to provide a return on their investment and for assuming both(prenominal) level of risk. If the company does not offer this risk to the investors, there is a chance that the shareholders might share these shares in the market. Selling of the company shares can be interpreted as a negative home for the financial outlook of the company and will put a downward impact on the market value of the company. Cost of companys equity can be calculated by dint of Dividend maturation Model and Capital Asset pricing model. The formula for dividend growth mo del is as follows. E = Do Ke - g Where E is the market value of the equity, Do is the recent dividend paid or the dividend projected for the abutting year, Ke is the cost of the equity and g is the growth rate of the dividend. The dividend growth model assumes that the dividend grows in perpetuity at a definite rate. This growth rate can be computed by observing the historical dividend ruler of the company and calculating the growth rate through simple discount rate formula. Cost of debt is really the rate at which the present value of the quest payments and redemption amounts equals the current market value of the debt. The by-line formula further clarifies. Where M is the market value of the bond currently on which it is being traded in the market, i is the interest payment and kd is the rate of return required by the debt holder. From the formula it can comfortably be deduced that the market value of any bond is the present value of the interest payment. But the above form ula is only applicable in the case of debt having maturity till perpetuity. In case evaluate is involved, the interest is taken after tax. Cost of debt is basically the internal rate of return. As provided in the effrontery information, the companys debt equity ratio is 50%, which means that 50% of its operations are financed through debt and the other half is through equity. The company has available cash balance of ?450,000 and thus, in case the company opts to purchase any of the buildings, it will have to issue bonds by acquiring to a greater extent debt. Since the company anticipates that the interest rates are likely to be increased in the future, it would be prudent to raise more funds through equity in order to curtail the impact of increased finance put on the profitability of the company. The project under consideration requires a careful estimation of all the applicable costs and revenues a misjudgment in the forecast will cause an error in the project profits presen t value, which might result in the acceptance of a project which is not financially viable. reckoning BASED ON DISCOUTNED CASHFLOW First, consider the building A which costs ?1,112,000. The following table presents the calculation of the illuminate Present Value (NPV) of the particular investment decision. Item Amount in ? 000 Years Now 1 2 3 4 5 6 7 8 9 10 Cost of the site (1,112) Cash in-flow