# Capital Budgeting Methods

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 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 ...

#### Solution Summary

The solution describes the steps to calculate PB, DPB, NPV, IRR, MIRR and MNPV in the given case.