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Capital Budgeting

1.Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its cost of capital is 12 percent. (Hint: Begin by constructing a time line)
a. what is the projects payback period (to the closest years)?

b. what is the projects discounted payback period?

c. what is the projects npv?

d. what is the projects irr?

e. what is the projects mirr?

2. Your division is considering two investment projects, each of which requires an up-front 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

What are the two projects net present values, assuming the cost of capital is 10 percent? 5 percent? 15 percent?

Solution Preview

a. what is the projects payback period (to the closest years)?

Payback period is the time taken to recover the initial investment. We cumulate the cash flows till we get a positive value. Here the postive value comes in year 5, the payback is less than 5 years. At the end of year 4, the recovery yet to be made is 4,125. The cash flow in year 5 is 12,000. we find the time taken to recover 4,125 in year 5. The payback period is ...

Solution Summary

The solution explains how to calculate the NPV, IRR and MIRR for a project.