Capital Budgeting Methods
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Given the following estimated CF (in millions of dollars) for a project with a required rate of return of 9% and a reinvestment rate of 13%:
Period: t=0 t=1 t=2 t=3 t=4
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Cash Flow: (350) 125 75 200 125
a. Compute PB
b. Compute DPB
c. Compute NPV
d. Compute IRR
e. Compute MIRR
f. Compute MNPV
Where does the 9% required rate of return and the 13% re-investment rate figure into the problem/equation?
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Solution Summary
The solution describes the steps to calculate PB, DPB, NPV, IRR, MIRR and MNPV in the given case.
Solution Preview
Please refer attached file for better clarity of tables.
a. Compute PB
Period Cash flow Cumulative
t Ct cash flow
1 125 125
2 75 200
3 200 400
4 125 525
We find that initial investment of $350 is recovered in 3rd year.
Amount to be recovered in 3rd year=TB=350-200=$150.00
Total cash flow in 3rd year=TC=$200.00
Payback period=2+(TB/TC)=2.75 Years
b. Compute DPB
Period Cash flow PV @9% Cumulative
t Ct Ct/(1+9%)^t PV
1 125 114.68 114.68
2 75 63.13 ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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