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Running head: CAPITAL BUDGETING 1
V-III Homework: Capital Budgeting
Shannon D. Burns
FIN 550: Corporate Financial Management
Southern University of New Hampshire
December 27, 2020
FIN550 – V-III Homework: Capital Budgeting 2
The director of capital budgeting at Brittle Company wants an analysis of two proposed capital investments: Project X and Project Y. Both projects have a cost of $10,000 with a cost of capital of 12%. The main difference between the two projects is the expected net cash flows from
year 1 to year 4. Based on the information given, the financial measure Net Present Value (“NPV”), Internal Rate of Return (“IRR”), and the Modified Internal Rate of Return (“MIRR”) will be used to explore the economic feasibility of both Project X and Project Y. First, we will find the net present value for each project. Net present value helps determine the profitability of a project by taking the difference between the present value of cash inflows and the present value
of cash outflows over time (Kenton, 2020). As stated, both projects have an initial investment of $10,000. The using all three financial measure methods the first one to be used is the Net Present
Value method (“NPV”). NPV is represents the “present value of the project’s expected future cash-flows, discounted at the appropriate cost of capital.” (Ehrhardt & Brigham, 2017)
NVP i
s used to determine the current value of all future cash-flows generated by a project, including the initial capital investment. (Jagerson, 2020)
NPV
=
R
t
(
1
+
i
)
t
Net Present Value (“NVP”) is the sum between each expected net cash-flow is calculated, and the investment is subtracted. NPV is the difference between the initial investment made in the project and the present value of future cash flows being discounted at the required rate of return on investment. For the first Project Y there is a NPV of $966, and while the second Project X has
an NPV of $631. Now, we are tasked in finding the Internal Rate of Return, (“IRR”) for each project. The Internal Rate of Return is another financial measure technique, is the discount rate that equates
FIN550 – V-III Homework: Capital Budgeting 3
the present value of the expected future cash inflows and outflows. The IRR is the annual
rate of growth an investment is expected to generate. “The IRR is calculated using the same concept as NPV, except NPV is equal to zero. 0
=
NPV
=
∑
t
=
1
T
C
t
(
1
+
IRR
)
t
−
C
0
where:
Ct = Net cash inflow during the period
C
0 = Total initial investment costs
IRR = The internal rate of return
t = The number of time periods (Fernando, 2020)
The first project, Project X has a higher IRR at 18%, while the second project, Project X has a lower IRR at 15%. Lastly, we now move to the last task of finding the Modified Internal Rate of Return, (MIRR) for each project. The Modified Internal Rate of Return “allows project managers
to change the assumed rate of reinvested growth from stage to stage in a project.” (Hayes, 2020) MIRR
=
n
√
FV
(
Positive cashflow ×Cost of capital
)
PV
(
Initial outlays×FInancing cost
)
−
1
where:
FVCF(c)
= the future value of positive cash flows at the cost of capital for the company
PVCF(fc)
= the present value of negative cash flows at the financing cost of the company
n
= number of periods MIRR assumes that flows from all projects are reinvested at the cost of capital not at the project’s own IRR, and therefore making the MIRR a better indicator of projects true profitability. (Ehrhardt & Brigham, 2017) Project X has a MIRR of 15%, and Project Y has a MIRR of 14%. After completing the financial investment analysis, we will use the Profitability
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Related Questions
Question:
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Expected Net Cash Flows
Year
Project X
Project Y
0
($10,000)
($10,000)
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
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Required:
Calculate each project’s payback period, discounted payback period, net present value (NPV), profitability index and internal rate of return (IRR).
Which project or projects should be accepted if they are independent?
Which project should be accepted if they are mutually exclusive?
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Year
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Project BF
0
-$100,000
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Expected Net Cash Flows
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3 3,000 3,500
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-$120,000
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1
Cost
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2
20,000
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10,000
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Year
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0
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($50,000)
1
25,000
15,000
2
20,000
15,000
3
10,000
15,000
4
5,000
15,000
5
5,000
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The projects’ expected net cash flows are as follows:
Expected Net Cash Flows
Year
Project A
Project B
0
($50,000)
($50,000)
1
25,000
15,000
2
20,000
15,000
3
10,000
15,000
4
5,000
15,000
5
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15,000
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The projects’ expected net cash flows are as follows:
Expected Net Cash Flows
Year
Project A
Project B
0
($50,000)
($50,000)
1
25,000
15,000
2
20,000
15,000
3
10,000
15,000
4
5,000
15,000
5
5,000
15,000
Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
Which project will you select if your decision was based solely on the project’s payback period?
Which project or projects should be accepted if they are independent?
Which project should be accepted if they are mutually exclusive?
d. How might a change in the cost of capital produce a conflict between the NPV and…
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The projects’ expected net cash flows are as follows:
Expected Net Cash Flows
Year
Project A
Project B
0
($50,000)
($50,000)
1
25,000
15,000
2
20,000
15,000
3
10,000
15,000
4
5,000
15,000
5
5,000
15,000
Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
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TO: EVERTON Major
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RE: Capital Budgeting Analysis
Provide an evaluation of the two proposed projects whose cash flow forecasts are found below:
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Others expected cash inflows:
Year $ $
1…
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Your employer is trying to select from a list of possible capital projects. The projects, along with their cost and benefits, are listed
below. The capital budget available is $1 million. In addition to spending constraints, your employer would like to select at least 2
projects. Projects 4 and 5 cannot both be selected together. Formulate the problem as a linear program and determine the optimal
solution.
Project
Cost
Net Present Value
$260,000
$210,000
$720,000
$590,000
2
$570,000
$470,000
$235,000
$215,000
$220,000
$490,000
Which projects should be selected?
Project 1 will
Project 2 will
Project 3 will
Project 4 will
Project 5 will
What is the total net present value of these projects?
Total net present value
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Please help me
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You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year
Project X
Project Y
0
– $10,000
– $10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
3,500
Use the Homework Student Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
Which project or projects should be accepted if they are independent?
Which project or projects should be accepted if they are mutually exclusive?
arrow_forward
You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year
Project X
Project Y
0
– $10,000
– $10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
3,500
Which project or projects should be accepted if they are independent?
Which project or projects should be accepted if they are mutually exclusive?
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Project (Capital Budgeting Techniques)
Use an Excel spreadsheet to perform the calculations. Be sure to show all the necessary steps involved in the calculation. Attach both the Excel spreadsheet and the Word document for this project.
Your division is considering two investment projects, each of which requires an up-front expenditure of $30 million. You estimate that the cost of capital is 8 % and that the investments will produce the following after-tax cash flows (in millions of dollars):
Year
Project A
Project B
1
5
25
2
15
15
3
20
10
4
25
8
What is the payback period? What are its advantages and disadvantages? What is the payback period for each project?
Calculate the NPV and IRR of the two projects. If the two projects are independent and the cost of capital is 8 %, which project or projects should the firm undertake? Briefly discuss merits and demerits of NPV rule for decision making.
If the two projects are mutually exclusive and the cost of capital is 8%,…
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.Assume you are the chief financial officer at Lehman Memorial Hospital. The CEO has asked you to analyze two proposed capital investment Project X and project Y each project requires a net investment outlay of $12,000 and the opportunity cost of capital for each project is 14% the project's expected net cash flows are as following
Year
Project x
Project Y
0
(12,000)
(12,000)
1
6,600
3,500
2
3,500
3,500
3
3,500
3,500
4
3,500
3,500
Calculate each project’s payback, NPV and IRR.
Which project is financially acceptable? Explain
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(d) State which project you would recommend to Dreamon Corporation if ONE project can be selected (i.e. mutually exclusive). Give reason to support your decision.
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Evaluate the following capital project proposals, given
a capital budget of $750 million.
project: IO (millions) PV(NCF 1-n) (millions)
A 100 120
B 500 625
C 400 490
D 250 290
please show work. I don't understand how to find the NPV
Answer: NPV= 165 million
IO = 750 million
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- You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 −$10,000 −$10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e. Why does the conflict exist?arrow_forwardNeed Help with this Questionarrow_forwardSuppose a company has the following three project and limits it capital budget to $50,000. Project Present Value of Cash Initial Investment A. $40,000. $25,000B. 37,500. 25,000C. 70,000. 50,0001. Calculate the projects' NPVs.2. Calculate the projects' PIs.3. Which project (s) should the company choose? Why?arrow_forward
- You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y -S10,000 -$10,000 6,500 3,500 3,000 3,500 3,500 3,500 3,000 1,000 a. Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive?arrow_forwardYou are a financial analyst for the H Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12 percent. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y ($100,000) ($100,000) 60,500 40,000 30,000 40,000 30,000 40,000 10,000 40,000 Required: Calculate each project’s payback period, net present value (NPV) and Profitability Index (PI) Which project or projects should be accepted if they are independent? Which project should be accepted if they are mutually exclusive?arrow_forwardThe following data table shows the estimated cash flows for two mutually exclusive capital budgeting projects that Glan Event Company can invest in. The cost of capital for both projects is 10.00%. Based on the table and the information given, determine both project’s NPV and IRR and decide which one yields a better outlook for the decision rationale of the projects. Year Project X Project Y 0 -$120,000 -$120,000 1 $100,000 $20,000 2 $40,000 $50,000 3 $10,000 $100,000arrow_forward
- Appelbaum Inc. is comparing several alternative capital budgeting projects as shown below: Projects A B C Initial investment $80,000 $120,000 $160,000 Present value of net cash flows 90,000 110,000 200,000 Using the net present value, how many of the projects are available?? Group of answer choicesarrow_forwardYou are a financial analyst for the Vincenzo Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 ($10,000) ($10,000) 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). Which project or projects should be accepted if they are…arrow_forwardAssume you are the chief financial officer at Lehman Memorial Hospital. The CEO has asked you to analyze two proposed capital investment Project X and project Y each project requires a net investment outlay of $10,000 and the opportunity cost of capital for each project is 14% the project's expected net cash flows are as following Year Project x Project Y 0 (10,000) (10,000) 1 6,500 3,000 2 3,000 3,000 3 3,000 3,000 4 1,000 3,000 a. Calculate each project’s payback, NPV and IRR. b. Which project is financially acceptable? Explain your answer.arrow_forward
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