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    Capital Budgeting Techiques

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    Need an example of the following calculations:
    1. Payback period
    2.Net Present value
    3.internal rate of return
    4.modified rate of return

    Describe what these metrics mean (interpret the reuslts). Why are these important?

    Need web sites available for additional info. I need to write a paper on capital budgeting.

    Need to be able to explain the calculations.

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    Solution Preview

    The example is in the attached file.
    1. Payback period - This is the time taken to get back the intial investment. In the given example, initial investment is 10,000 and then you get 7,500 each year for 3 years. In the first year we get 7,500 and a balance of 2,500 is left. In the next year we get 7,500. We need to find out in how much time we get 2,500. In 12 months we get 7,500 so we get 2,500 in 12/7500 X 2,500 = 4 months. The Payback period is 1 year and 4 months. Payback period is a measure of liquidity since it tells us how fast the monvey which has been invested is recovered.
    2. Net Present Value ( NPV) - In NPV calculation, we dicount the cash inflows at the rate given and sum them up and to this sum we add the initial investment to get the NPV. In the example, the sum of discounted cash flows is 18,651 and the ...

    Solution Summary

    The solution explains the capital budgeting techniques - Payback period, Net Present value, internal rate of return and modified rate of return