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# Capital Budgeting on Excel

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Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests \$250,000 in a new computer system, it can save \$75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Ignore income taxes and assume all cash flows occur at year-end except for initial investment amounts to calculate the following:
1. Net present value
2. Payback period
3. Discounted payback period
4. Internal rate of return (using the interpolation method)
5. Accrual accounting rate of return based on the net initial investment (assume straight-line depreciation)
6. What other factors should Three Rivers consider in deciding whether to purchase the new computer system?
7. Should they purchase the new system? Why or why not?

#### Solution Summary

Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests \$250,000 in a new computer system, it can save \$75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Ignore income taxes and assume all cash flows occur at year-end except for initial investment amounts to calculate the following:
1. Net present value
2. Payback period
3. Discounted payback period
4. Internal rate of return (using the interpolation method)
5. Accrual accounting rate of return based on the net initial investment (assume straight-line depreciation)
6. What other factors should Three Rivers consider in deciding whether to purchase the new computer system?
7. Should they purchase the new system? Why or why not?

\$2.19

## Solver - Excel

Someone has determined that the firm's capital investment budget will be \$5,000,0000 for the upcoming year. Unfortunately, this amount is not sufficient to cover all the positive NPV projects that are available to the firm.

You have been asked to choose which investments, of those listed in the table should be made. (Table attached)

a. Using the Solver, determine which of the above projects should be included in the budget in the firm's goal is to maximize shareholder wealth. (Make sure to set the Solver options to Assume Linear Model)

b. Now assume that the CFO has informed you that project A and B are mutually exclusive, but one of them must be selected. Change your Solver constraints to account for this new information and find the new solution.

c. Ignore the constraints from part B. The CFO has now informed you that Project 1 is of great strategic importance to the survival of the firm. For this reason it must be accepted. Change your Solver constraints to account for this new information and find the new solution.

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