Explore BrainMass

Explore BrainMass

    Capital Budgeting Parameters

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    If the intital investment is $6.45 M and the net operating cash flow is 2.45 M for 5 years at a 8% cost of capital what is the:

    Discounted Payback Rate?
    Profitability Index?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:52 pm ad1c9bdddf

    Solution Preview

    Please refer attached file for better clarity of formulas and tables.

    Since there is constant oprating cash flow, Payback period is given by
    Payback Period=Initial investment/operating cash flow=2.63 years

    Discounted Payback Rate?
    Year Cash flow PV factor PV of Cash flow Cumulative PV
    @8% Cash Flow*PVF
    1 2.45 0.9259 2.2685 2.2685
    2 2.45 0.8573 2.1005 4.3690
    3 2.45 0.7938 1.9449 6.3139
    4 2.45 0.7350 1.8008 8.1147
    5 2.45 ...

    Solution Summary

    Solution depicts the methodology to calculate Payback Period, Discounted Payback Rate, NPV, Profitability Index, IRR and MIRR for the given investment proposal.