RESPONSES

BRANNON’S POST:

1. Discuss the concepts that were most challenging for you in the readings and review material. How did the practice exercises help clarify these?

The risk and return (CH 7) equations were a little frightening. Question 7.2 got me in a fuss a bit. I had to calm down and do a lot of research (YouTube) to orient myself. Maybe since I have Covid, I been pig headed. The symbols took me a while but the study guide helped me a lot. 

Also, the Internal Rate of Return  (Ch 10) is still hitting me in the chest a bit. I understand the concept and how it pertains to multiple years. But every time I complete a study problem the math is not “mathing.” I guess Youtube  is for me!

2. What did you learn that will help you determine the most appropriate way to finance the investments you previously recommended for LGI?

 The Capital Asset Pricing Model (CAPM) is a great finance tool to understand the expected return on investment for LGI.  The expected return for a portfolio can be predicted using CAPM. This tool is for investors who need to estimate the risk-free rate, the market risk premium and beta of the investment. It essentially is a way to assess the relationship between risk and return. LGI will need to use this tool in choosing between two or more investments. 

References   

Bates, T., Kidwell, D., & Parrino, R. 2011. 
Fundamentals of Corporate Finance, Second Edition. Wiley.

DELANEY’S POST:

One concept that was a bit challenging to me was solving for the IRR.  The IRR is the discount rate at which a project has an NPV equal to zero (UMGC, 2023).  A project is acceptable if its IRR is greater than the firm’s cost of capital (UMGC, 2023).  This method was confusing to me when trying to understand how to solve for an NPV of zero until seeing the practice problems.  In problem 10.36, we are given a cost of capital of 16%, and we know that the NPV is negative, so the IRR we are solving for is going to be less than the cost of capital.  This made it a lot clearer in which direction we are going to be solving for the IRR, but I still do not quite grasp how we know where to start as a guessing point – for example starting at 3% in problem 10.36.  Most likely I am guessing there is a much easier way to solve for IRR on a calculator rather than simply guess and check, but I don’t know if my TI-36X Pro is capable of that kind of formula or not.

The payback period is very helpful to see how LGI can compute the time it takes for the sum of the net cash flows from a project to equal the project’s initial investment (UMGC, 2023).  This will help us have an idea of how to evaluate the capital we are using within the sale of the Bowie plant, as well as the purchase of the new more efficient equipment.  When using discounted cash flows, we can then analyze when LGI will have a positive NPV which is helpful for management to know. 

University of Maryland Global Campus (UMGC). (2023). 
Project 5 Review and Practice Guide.  Document posted in University of Maryland Global Campus (UMGC) MBA 620 Online Classroom, archived at http://campus.umgc.edu