Explore BrainMass

Explore BrainMass

    Capital Budgeting: Evaluate 3 Projects with the 6 Capital Budgeting Tools

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Evaluate the following 3 projects with all of the 6 capital budgeting tools (Net Present Value, Internal rate of Return, Profitability Index, Payback Period, Discount Payback Period, Modified Internal rate of Return). Which projects would you approve? If you could do only one (assume the most you have to invest is $500), which one would you choose and why? in other words, which project would you pick as the best:
    Projected

    Cash Flow Years 0 1 2 3 4 5

    Project A (500) 45 55 65 175 185

    Project B (250) 85 65 55 45 100

    Project C (400) 175 75 75 175 25

    Use 10% as the discount rate and WACC (and the IRR/MIRR hurdle rate)

    *Year 0 is your initial cost outlay -- the cost of the project.

    © BrainMass Inc. brainmass.com June 3, 2020, 9:02 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/capital-budgeting-evaluate-3-projects-with-the-6-capital-budgeting-tools-163442

    Solution Preview

    Project A Project B Project C
    Cash Flow Years Cash Flow Cash Flow Years Cash Flow Cash Flow Years Cash Flow
    0 -500 0 -250 0 -400
    1 45 1 85 1 175
    2 55 2 65 2 75
    3 65 3 55 3 75
    4 175 4 45 4 175
    5 185 5 100 5 25
    NPV = -130 NPV = 15 NPV = 12

    NPV of Project B is the highest.

    Project A Project B Project C
    Cash Flow Years Cash Flow Cash Flow Years Cash Flow Cash Flow Years Cash Flow
    0 -500 0 -250 0 -400
    1 45 1 85 1 175
    2 55 2 65 2 75
    3 65 3 55 3 75
    4 175 4 45 4 175
    5 185 5 100 5 25
    IRR = 1.31% IRR = 12.36% IRR = 11.40%

    Profitability Index = PV of Future Cash Flows/Initial Investment

    Project A 0.74 Project B 1.06 Project C 1.03

    Payback period is defined as the expected number of years required to recover the original investment.

    Project A
    Period 0 1 2 3 4 5
    Net cash flow -500 45 55 65 175 185
    Cumulative NCF -500 -455 -400 -335 -160 25 ...

    Solution Summary

    This solution provides step by step calculations of NPV, IRR, profitability index, payback period, discounted payback period, and MIRR in an attached Excel file.

    $2.19

    ADVERTISEMENT