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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
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.