Capital Budgeting

(25 points)

Provide your final answers in the spaces provided below. Excel is recommended but not required for problems 1–4. Excel is highly recommended for the final problem (#7).

1. Project M has a cost of $65,125, expected net cash inflows of $13,000 per year for 10 years, and a cost of capital of 11%.

(a) (2 points) What is the project’s payback period (to the closest year)?

(b) (2 points) What is the project’s discounted payback period?

(c) (2 points) What is the project’s NPV?

(d) (2 points) What is the project’s IRR?

(e) (1 points) Based on the answers to parts (a) – (d), should the project be accepted? Why or why not?

6. Your division is considering two facility investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following net cash flows:

Year Project A Project B .

1 $5,000,000 $20,000,000

2 $10,000,000 $10,000,000

3 $20,000,000 $6,000,000

(a) (2 points) What are the projects’ net present values when the cost of capital is 5%? Which project has the greater NPV?

(b) (2 points) What are the projects’ NPVs when the cost of capital is 10%? Which project has the greater NPV?

(c) (2 points) What are the projects’ NPVs when the cost of capital is 15%? Which project has the greater NPV?

(d) (1 points) Do alternative rates change the decision? Explain.

7. You are a financial analyst for the University of South Carolina’s athletic department. As part of its master facilities plan, the department’s CFO has asked you to analyze a capital investment, Project X. The project cost $15 million and the cost of capital is 8.75%. The project’s expected net cash flows are as follows:

0. (4 points) Calculate the project’s payback period and discounted payback period.

0. (5 points) Calculate the project’s net present value (NPV) and internal rate of return (IRR).

0. (EXTRA CREDIT [1 point]) Calculate the project’s modified internal rate of return (MIRR).

Period

Cash Flows

0

(15,000,000.00)

$

1

1,500,000.00

$

2

1,530,000.00

$

3

1,560,600.00

$

4

1,591,812.00

$

5

1,623,648.24

$

6

1,656,121.20

$

7

1,689,243.63

$

8

1,723,028.50

$

9

1,757,489.07

$

10

(3,207,361.15)

$

11

2,000,000.00

$

12

2,040,000.00

$

13

2,080,800.00

$

14

2,122,416.00

$

15

2,164,864.32

$

16

2,208,161.61

$

17

2,252,324.84

$

18

2,297,371.34

$

19

2,343,318.76

$

20

(3,609,814.86)

$

21

2,500,000.00

$

22

2,550,000.00

$

23

2,601,000.00

$

24

2,653,020.00

$

25

2,706,080.40

$

26

2,760,202.01

$

27

2,815,406.05

$

28

2,871,714.17

$

29

2,929,148.45

$

30

2,987,731.42

$

Project X