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    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
    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.