Capital Budgeting: cash flows on excel spread sheet
ewagker0ku
problem_set_capital_budgeting.docxProblem Set: Capital Budgeting
Problems 1-4:
You are given the following information for a project: The initial investment is $750,000 and the cost of capital is 10%. The project has a six year life and the project’s cash flows are expected to be:
|
Year |
Total Cash Flow |
|
1 |
$150,000 |
|
2 |
$250,000 |
|
3 |
$300,000 |
|
4 |
$400,000 |
|
5 |
($50,000) --> negative cash flow |
|
6 |
$350,000 |
1. Determine the payback period. If the payback required by the company is 3 years, what is your recommended decision on this project? 3.125 yrs - reject
2. Determine the NPV for the project. What is your recommended decision? 258,095
3. How much could the firm afford to pay (instead of $750,000) for the project and still decide to go forward (i.e. have an NPV>0)? Assume the cash flows are as shown for years 1-6. 1,008,095- change the initial investment until the NPV=0
4. Determine the MIRR for the project. The company requires an MIRR in excess of their cost of capital – what is your decision? 15.36% - accept
Problems 5-8:
A project that costs $5,000 has expected net cash flows over its 5 year life of:
|
Yr 1 |
$2,500 |
|
Yr 2 |
$3,500 |
|
Yr 3 |
$2,000 |
|
Yr 4 |
$1,500 |
|
Yr 5 |
$1,000 |
5. What is the payback period for the project? 1.7143 yrs
6. What is the discounted payback period for the project if the discount rate is 8%? 1.895 yrs
7. What is the IRR? 38.32%
8. What is the NPV? 3,686.29
Problems 9-11:
A project has an upfront cost of $10,000 and a maintenance cost of $7,500 in year 4. The operating cash flows from the project (not including the maintenance cost in year 4) are:
|
Yr 1 |
$3,500 |
|
Yr 2 |
$5,500 |
|
Yr 3 |
$6,000 |
|
Yr 4 |
$4,500 |
|
Yr 5 |
$4,000 |
|
Yr 6 |
$4,000 |
9. Determine the MIRR if the discount rate is 8%. 15.18%
10. Determine the NPV if the discount rate is 8%. 5,757
11. What is the Profitability Index (if the discount rate is 8%)? 1.5757
