Capital Budgeting Problem
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Problem A: Try evaluating the following projects with all of the basic capital budgeting tools, in other words, which project would you pick as the best:
Projected
Cash Flow Years 0 1 2 3 4 5
Project A (500) 45 55 65 175 185
Project B (250) 85 65 55 45 100
Project C (400) 175 75 75 175 25
Use 10% as your discount rate!
Remember, NPV is always in dollars, IRR is a percentage, PI is an index number, and PB is in years. I have done PI and PB for you with project A.
*Year 0 is your initial cost outlay -- the cost of the project.
Calculate the following for each project:
NPV IRR PI PB
Project A 1.26** 4.86 yrs
Project B
-
Project C
Hint: there are many ways to solve this problem, some are shorter than others. For the shortest way, look in your calculator guide on calculating NPV and IRR. It involves using the blue g key and the Cfo and Cfj keys (using the HP-12C).
Problem B: -- calculate DPB and MIRR for the following projects :
YEAR 0 1 2 3 4 5
Project B (250) 85 65 55 45 100
Project C (400) 175 75 75 175 25
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Solution Summary
The solution is in excel sheet that shows the calcualtions of NPV, IRR, MIRR, PI.
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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