Basic Tools To Determine A Proper Capital Budget

Question Description

ASSIGNMENT 1: For this unit we will expand on the basic tools to determine a proper capital budget. Start by reading the following article concerning commercial real estate investment analysis and a generic monte carlo simulation.

http://llenrock.com/blog/monte-carlo-simulation-for-rei-analysis/ (Links to an external site.)Links to an external site.

1) Explain, in detail, what the author’s primary contention is against using simplistic NPV models for capital budgeting.

2) From a financial manager’s perspective, refute the author’s argument using concepts from chapter 12 and 13. Feel free to debate with fellow students about the same in their postings. (in other words, why would using a monte carlo simulation be ineffective for capital budgeting?)

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ASSIGNMENT 2: ABC Mining is evaluating the introduction of a new ore production process. Two alter¬natives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Production Process B also requires an initial investment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A. If ABC Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B?

Show your work for full credit!- include references

book for this course: Title: Intermediate Financial Management; Author: Eugene F. Brigham, Phillip R. Daves

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