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1) If you were evaluating an investment opportunity, which technique would you use and why?
If I was evaluating an investment opportunity for my company, the technique I would use would be the Net Present Value (NPV). Whenever a company is looking for different investment opportunities, it is crucial for them to calculate the Net Present Value of that investment because it represents the present value of all of the projected cash inflows. As a matter of fact, the concept of Net Present Value Rule (NPVR) states that a company should only invest in opportunities that have a positive Net Present Value because it shows that “theoretically” (there are no certainties in investments) they’ll be profitable, however, an investment with a negative net present value will ultimately result in a loss for the investor.
3) You are comptroller for your company. The CEO is a savvy individual with great instincts for the business. She strongly favors an investment that is only marginally acceptable at best. She has asked you to put together justification for it. What will you do?
If I was the comptroller of my company and my CEO wanted to proceed with an investment that was only marginally acceptable, and then asked me to put together a justification for it; I would have to have a very strategic plan if I wanted to keep my job (I would also begin to improve my resume). First and foremost, it is my responsibility as the comptroller to make sure that the company is investing in ways that will be profitable, financially viable, and overall beneficial for the company. I would begin by doing my research to find different investment opportunities that were more secure and yet still had a decent rate of return for our investment. As the say goes, always bring solutions to problems. I would then approach the CEO letting her know my concerns with the marginally acceptable investment, what things are wrong with proceeding with that investment, and then following on by showing her the investment opportunities that I found that were much safer and a better investment opportunity overall.
5) Last year your company financed its investments by selling shares of common stock. This year the plan is to use debt. The after-tax cost of debt is 5%, the cost of equity is 12% and the weighted average cost of capital is 9.5%. The first investment for this year is an expansion project. What cost of capital will you use and why?
For our expansion project investments this year, the cost of capital that we will be utilizing will be the Weighted Average Cost of Capital (WACC). Whenever you are looking for the most accurate and total picture of the cost of capital, look no further than the Weighted Average Cost of Capital which would be 9.5% for the upcoming year. WACC is widely used and accepted among almost all financial analyst today and it is an important calculation. It is very useful for companies when evaluating prospective projects and what risk that they will have on the company.
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