Description
Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the project’s ability to earn the company additional compensation. The 3 main tools used to make this evaluation are the pay-back period, net present value (NPV), and internal rate of return (IRR).
Year | Project #1 | Project #2 | Project #3 |
0 | ($30,000) | ($32,000) | ($35,000) |
1 | $11,000 | $15,000 | $11,000 |
2 | $11,000 | $14,000 | $11,000 |
3 | $11,000 | $11,000 | $11,000 |
4 | $11,000 | $2,000 | $11,000 |
5 | $11,000 | $500 | $11,000 |
Scenario | NPV Rate |
1 | 5% |
2 | 5.5% |
3 | 6% |
Using the data in the tables above, answer the following questions:
- Calculate the NPV for each project using each scenario's NPV rate. Show your work.
- Calculate the pay-back period for each project. Show your work.
- Calculate the IRR for each project. Show your work.
- Which project would the company select using the NPV method in scenario 1? Explain your answer.
- Which project would the company select using the NPV method in scenario 2? Explain your answer.
- Which project would the company select using the NPV method in scenario 3? Explain your answer.
- Which project would the company select using the pay-back period? Explain your answer.
- Which project would the company select using the IRR method? Explain your answer.
Each bullet is its own detailed paragrap
Explanation & Answer
In the attached,i have eliminated the working from the word document so that if its fine with you to transmit the word document and excel workings separately but you can clarify on the two
Capital budgeting Techniques
Capital Budgeting Techniques
Student Name
Course
Instructors Name
Date
Capital budgeting Techniques
The net present value is the difference between the present values of cash inflows and the
present values of the cash outflow. The formula for computation is denoted as:
𝑇
Ct
NPV=∑
𝑛=1
((1+r)t − Co), where t=number of time period, Ct=net cash inflows during the
period, Co=Total initial outlay and r= discount rate
The net present values for the three projects under all the three scenarios are as shown below
year
0
1
2
3
4
5
Project 1
PVIF @
CF
5%
($30,000)
1.0000
$11,000
$11,000
$11,000
$11,000
$11,000
0.9524
0.9070
0.8638
0.8227
0.7835
NPV
year
0
1
2
3
4
5
CF
($30,000)
$11,000
$11,000
$11,000
$11,000
$11,000
Scenario 1 @ 5%
Project 2
PVIF@
PV
CF
5%
PV
($32,000)
($30,000)
1.0000
($32,000)
$15,000
$10,476.19
0.9524 $14,286.00
$14,000
$9,977.32
0.9070 $12,698.41
$11,000
$9,502.21
$9,501.80
0.8638
$2,000
$9,049.73
$1,645.40
0.8227
$500
$8,618.79
$391.75
0.7835
$17,624.24
NPV
$6,523
Project 1
PVIF
@5.5%
PV
1
($30,000)
0.9479 $10,426.54
0.8985 $9,882.98
0.8516 $9,367.75
0.8072 $8,879.38
0.7651 $8,416.48
NPV
$16,973
Scenario 2 @ 5.5%
Project 2
PVIF
CF
@5.5%
PV
($32,000)
1
($32,000)
$15,000
0.9477 $14,215.50
$14,000
0.8985
$12,579
$11,000
0.8516 $9,367.60
$2,000
0.8072 $1,614.40
$500
0.7651
$382.55
NPV
$6,159
CF
($35,000)
$11,000
$11,000
$11,000
$11,000
$11,000
project 3
PVIF
@5%
1.0000
0.9524
0.9070
0.8638
0.8227
0.7835
NPV
CF
($35,000)
$11,000
$11,000
$11,000
$11,000
$11,000
PV
($35,000)
$10,476.40
$9,977.32
$9,501.80
$9,049.70
$8,618.50
$12,624
project 3
PVIF
@5.5%
PV
1
($35,000)
0.9477 $10,424.70
0.8985 $9,883.50
0.8516 $9,367.60
0.8072 $8,879.20
0.7651 $8,416.10
NPV
$11,971
Capital budgeting Techniques
year
0
1
2
3
4
5
CF
($30,000)
$11,000
$11,000
$11,000
$11,000
$11,000
Project 1
PVIF 6%
1.0000
0.9434
0.8900
0.8396
0.7921
0.7473
NPV
Scenario 3 @6%
Project 2
PV
CF
PVIF 6%
PV
($32,000)
($30,000)
1.0000
($32,000)
$15,000
$10,377.36
0.9434 $14,150.94
$14,000...
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