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.
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1) Explain, in detail, what the authorâ€™s primary contention is against using simplistic NPV models for capital budgeting.
2) From a financial managerâ€™s perspective, refute the authorâ€™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?)
ASSIGNMENT 2: ABC Mining is evaluating the introduction of a new ore production process. Two alterÂ¬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