Capital Budgeting
Luz A comas
Strayer University
Professor: Michael Hamuicka
Financial Management – FIN 534
05/02/2011
Abstract
Capital budgeting is one of the most important areas of financial management. There are several techniques commonly used to evaluate capital budgeting projects namely the payback period, accounting rate of return, present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or nondiscounted payback period (PP) models over the net present value (NPV), which is the model academics consider superior. The term capital budgeting refers to long term planning for …show more content…
d. To examine the sensitivity of this project to the discount rate, management would like to compute the NPV for different discount rates. Create a graph, with the discount rate on the xaxis and the NPV on the y axis, for discount rates ranging from 5% to 30%. For what ranges of discount rates does the project have a positive NPV?
Answers:
a. The NPV of the estimate free cash flow is
NPV =  150 + 36 X 1 (1 1/ (1.12) ^9) + 48 = $57.3 million. 0.12 (1.12) ^10
b. Initial Sales 90 100 110
NPV 20.5 57.3 94.0
Bauer Industries  Free cash flow Projections ( in millions of dollars)               year 0  Year 1  Year 2  Year 3  Year 4  Year 5  Year 6  Year 7  Year 8  Year 9  Year 10  Revenues   110  110  110  110  110  110 

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