Financial Management Essay Example | Topics and Well Written Essays - 2000 words - 3

Financial Management - Essay ExampleWith this rule, some(prenominal) roves qualify as corking projects, although the pulley project has a higher value.The rule for the internal rate of return states that a minded(p) project should only be accepted if the projects IRR is greater than or equal to the hards cost of great. The trustys cost of capital is 14%, in which case the transport project yields an IRR of 15%, it is to be accepted the pulley projects IRR is also higher than the bulletproofs cost of capital at 20%.The flaw with using IRR is that the rate of growth of funds flows is assumed to be the IRRs. By using the modified IRR or MIRR, the rate of growth of cash flows or the so-called reinvestment rate is the cost of capital, or cost of funding the investment instead of the IRR. The rule for accept a project based on MIRR is same as the IRR, that is, if MIRR is greater than or equal to the firms cost of capital, it should be accepted. Otherwise, it should be rejected as it will not contribute additional value to the firm.By using 14% as the finance rate and reinvestment rate, we get MIRR for the motortruck project as 14.5%--higher than the cost of capital, therefore it is to be accepted. With the pulley project, the MIRR is 17%, also higher than the cost of capital so the project should also be accepted.Davis Industries must choose between a gas-powered and an electric-powered forklift truck for travel materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are reciprocally exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to consort it will cost $22,000, whereas the gas powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per