Understanding Discounted Cash Flow and Direct Cap Method


Added on  2019-09-30

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Answer 1As per the Row 12, we have computed Cost as per IRR and the cost works out to $1359036. Actualcost of the Machinery to be purchased is $2000000. hence the NPV is less than the Cost of Machinery.Project is hence not feasibleThe Discounted Cash flow method takes into consideration Time value of money. Direct Cap method does not take into consideration Time Value of Money.The expected return or the IRR is not considered in Direct Cap Method and hence the value resultchangesThe IRR is the interest earned / forgone during the project period which is very crucial for Decisionmaking and identifying the viability of the project The Yeild to Maturity rate is different than the IRR Method in a way that the YTM rate assumes theinvestment is already made and the coupon interest earned is assumed to be reinvested back into theproject is the assumption Answer 2Project is not feasible, as the Net present value after discounting at the rate of 10% of the project witha fixed 3 year return and perpetual increase in return post 4 years at 8% consistency works out to$1359036The project cost - in terms of purchasing of machinery is $2000000. The same is higher than the NPVIt implies that the project is not worthy of giving $2000000 considering the Time value of money andhence not viable Answer 3Terminal Cap rate is that rate which is constant for future cash inflows.It means, that the project shall earn a consistent return of a particular amount at the perpetualgrowth rate which is known as the terminal Cap rate It is a very important concept in Time value of money, because the earning in the project are forlifetime / till the project is wound upThe IRR gets impacted in the sense that the accurate result is not provided without considering thetime value of money Answer 4Present Value factor at various IRR Levels IRR 10%11%12%13%14%111110.9090.9010.8930.8850.8770.8260.8120.7970.7830.7690.7510.7310.7120.6930.67515%16%17%18%19%

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