Capital Budgeting Practice Problems

order

Part 1. Capital Budgeting Practice Problems

a. Consider the project with the following expected cash flows:
Year Cash flow
0 -$400,000
1 $100,000
2 $120,000
3 $850,000

•If the discount rate is 0%, what is the project’s net present value?
•If the discount rate is 2%, what is the project’s net present value?
•If the discount rate is 6%, what is the project’s net present value?
•If the discount rate is 11%, what is the project’s net present value?
•With a cost of capital of 5%, what is this project’s modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the “x” axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand ‘smooth’ curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[ Look at the graph you draw and write a short paragraph stating what the graph ‘shows”]..

b. Consider a project with the expected cash flows:
Year Cash flow
0 -$815,000
1 $141,000
2 $320,000
3 $440,000

•What is this project’s internal rate of return?
•If the discount rate is 1%, what is this project’s net present value?

•If the discount rate is 4%, what is this project’s net present value?

•If the discount rate is 10%, what is this project’s net present value?

•If the discount rate is 18%, what is this project’s net present value?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the “x” axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand ‘smooth’ curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[ Observe the graph and write a short paragraph stating what the graph ‘shows]

c. A project requiring a $4.2 million investment has a profitability index of 0.94. What is its net present value? (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment)

Part 2.

Read the article below. Then write a one-to-two page paper answering the following question:

Which method do you think is the better one for making capital budgeting decisions – IRR or NPV?

Defend your answer with references to the background materials.

Please read the following article which is available in Proquest:

Internal rate of return
Computerworld. Framingham, Feb 17, 2003, Gary H Anthes.

Abstract:
Internal rate of return (IRR) is the flip side of net present value (NPV) and is based on the same principles and the same math. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return, often a company’s cost of capital. IRR, on the other hand, computes a break-even rate of return. It shows the discount rate below which an investment results in a positive NPV and above which an investment results in a negative NPV. It is the breakeven discount rate, the rate at which the value of cash outflows equals the value of cash inflows.

Assignment Expectations:

This assignment consists of a quantitative section (Part 1) and a an essay section (Part 2) below. Upload both sections as one Word document by the end of the Module.

order

Last Completed Projects

# topic title discipline academic level pages delivered
6
Writer's choice
Business
University
2
1 hour 32 min
7
Wise Approach to
Philosophy
College
2
2 hours 19 min
8
1980's and 1990
History
College
3
2 hours 20 min
9
pick the best topic
Finance
School
2
2 hours 27 min
10
finance for leisure
Finance
University
12
2 hours 36 min

Are you looking for a similar paper or any other quality academic essay? Then look no further. Our research paper writing service is what you require. Our team of experienced writers is on standby to deliver to you an original paper as per your specified instructions with zero plagiarism guaranteed. This is the perfect way you can prepare your own unique academic paper and score the grades you deserve.

Use the order calculator below and get ordering with premiumessayhelp.com now! Contact our live support team for any assistance or inquiry.

Type of paper Academic level Subject area
Number of pages Paper urgency Cost per page:
 Total: