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Managing Projects College - Essay Example

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Managing Projects College

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 ...Show more

Summary

weighted average cost of capital is an expression used to evaluate whether taking a certain course of action would be worth, this is because a company creates value of its share holders by adding value on there capital beyond their original contribution therefore necessitating the calculation of WACC.
Author : dawsonlind
Managing Projects College Essay essay example
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