Reference no: EM131454105
Problem 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?
2. Determine the NPV for the project. What is your recommended decision?
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.
4. Determine the MIRR for the project. The company requires an MIRR in excess of their cost of capital - what is your decision?
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?
6. What is the discounted payback period for the project if the discount rate is 8%?
7. What is the IRR?
8. What is the NPV?
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%.
10. Determine the NPV if the discount rate is 8%.
11. What is the Profitability Index (if the discount rate is 8%)?