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Basic Formula
WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-Tc)]
(Percentage of finance that is equity x Cost of Equity) + (Percentage of
finance that is debt x Cost of Debt) x (1 Tax Rate)
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
Tc= Tax Rate
Why it Matters:
It's important for a company to know its weighted average cost of capital as a
A company looking to lower its WACC may decide to increase its use of
cheaper financing sources.
Net Present Value is the present value of net cash inflows generated by
a project including salvage value, if any, less the initial investment on
the project. It is one of the most reliable measures used in capital
budgeting because it accounts for time value of money by using
Thus, we have the following two formulas for the calculation of NPV:
When cash inflows are even:
NPV = R 1 (1 + i)-n Initial Investment
In the above formula,
Where,
Decision Rule
Disadvantage:
It is based on estimated future cash flows of the project and estimates may
be far from actual results.
Accept/reject criterion
The acceptance and rejection is done on the basis of the IRR rate.
IRR
(a) It takes interest as a- unknown factor
(b) It calculates maximum
Conflicts:
Merits &demerits:
Overview
You need to know the internal rate of return on any investment may be to