Capital Budgeting

To make the most informed decision the IRRs and payback periods of the projects should be compared in conjunction with the NPVs of the two projects. The NPV analysis of the two projects under consideration indicates that the MMDC Project is the better of the two projects.

When choosing between projects with acceptable IRRs, the one with the highest IRR should be chosen.

5. What is the project’s MIRR? What is the difference between the IRR and the MIRR? Which is

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

As the Assistant Financial Analyst, the recommendation is based on Caledonia Product’s financial models and future trends, most notably future earnings. Project A is the one that should be accepted to avoid potential risks and safeguard the company’s investment. Let’s review the payback period, net present value, and internal rate of return report. The payback period is essential because it separates the long-term and short-term projects, favoring Project A, which recoups its investment more than year earlier than Project B. the best advice is to invest with the project that has a shorter payback period because the liquidity will increase, plus it spotlights the

5) Consider two mutually exclusive R&D projects that AMD, a chip manufacturer, is considering. Assume the corporate discount rate is 15 per cent and the minimum acceptable IRR is 25 per cent.

1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk

After calculating the Total Cash Flow for all three scenarios, the Internal Rate of Return (IRR) and Net Present Value (NPV) for the project can be calculated as well. See Question 3 for details regarding WACC calculation. The IRR and NPV for each scenario are shown in Table 4 below:

2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?

3. The NPV method is better because it shows the size of the project so you can see how much value a project has not just a percentage. You could have a higher percentage but a much lower value and you would still go for the lower percentage.

Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is

NPV and IRR: When examining the NPV and the IRR of the Merseyside project, the numbers were very attractive. It had a positive net present value and an IRR above 10 percent. By these numbers, along with others,

The IRR technique use the accept/reject criteria of comparing the IRR with the cost of capital which is based on comparing the internal rate of return to the cost of the capital of the project.