Capital Budgeting using Net Present Value Method PV of Cost of Investment PV of Net Cashflow: Net Present Value Year 1 2 3 5 Initial investment = 2,700,000 Net Income + Depreciation 424,136.33 518,972.18 655,465.06 804,369.79 944,783.16 PV Factor of 12% 0.8929 0.7972 0.7118 0.6355 0.5674 Present Value of Net Cashflow 2,807,294.61 631,449.13 703,622.11 366,400.07 351,076.44 335,063.91 2,387,611.66 -419,682.95
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- AFN EQUATION Refer to Problem 16-1. What additional funds would be needed if the companys year-end 2019 assets had been 4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 16-1? Is the companys capital intensity the same or different? Explain.Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Assuming a cost of capital of 14%, which of these projects should be accepted?Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Under what conditions on the cost of capital should project B be preferred to project A?
- Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Calculate the payback period and discounted payback period for projects A & B.Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 12% for the calculation of MIRR.Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 If Project A and Project B are independent, which project should be undertaken?
- Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Sketch the NPV profile for projects A & B.Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Determine the crossover point for these projects’ NPV profiles.CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Time 0 1 2 3 4 5 Project A -6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a.Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b.Assuming the projects are independent, which one(s) would you recommend? c.If the projects are mutually exclusive, which would you recommend? d.Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? e.Which calculation would you recommend in your evaluation—NPV or IRR? Why?
- Consider an investment with the following cash flows: Year Cashflows PV of P 1 @ 14% 0 (P 31,000) 1.000 1 10,000 .877 2 20,000 .770 3 10,000 .675 4 10,000 .592 Salvage value 5,000 The cost of capital is 14%. What is the profitability index (PI)? 1.842 1.824 1.482 1.284CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Time 0 1 2 3 4 5 Project A -6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -18,000 $5,600 $5,600 $5,600 $5,600 $5,600 d.Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? e.Which calculation would you recommend in your evaluation—NPV or IRR? Why?Consider an investment with the following cash flows: Year Cashflows PV of P 1 @ 14% 0 (P 31,000) 1.000 1 10,000 .877 2 20,000 .770 3 10,000 .675 4 10,000 .592 Salvage value 5,000 The cost of capital is 14%. What is the profitability index (PI)? a. 1.842 b. 1.824 c. 1.482 d. 1.284
