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# NPV, Investment Outlays, and Capital Budgeting

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(10-1) NPV
A project has an initial cost of \$52,125, expected net cash inflows of \$12,000 per year for 8 years, and a cost of capital of 12%. What is the projectâ??s NPV? (Hint: Begin by constructing a time line).
(10-2) IRR
Refer to Problem 10-1. What is the project's IRR?
(10-3) MIRR
Refer to Problem 10-1. What is the project's MIRR?
(10-4) Profitability Index
Refer to Problem 10-1. What is the project's PI?
(10-5) Payback
Refer to Problem 10-1. What is the project's payback period?
(10-6) Discounted Payback
Refer to Problem 10-1. What is the project's payback period?
(10-7) NPV
Your division is considering two investment projects, each of which requires an upfront expenditure of \$15 million. You estimate that the investments will produce the following net cash flows:
Year Project A Project B
1 \$5,000,000 \$20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
a. What are the two project's net present values, assuming the cost of capital is 5%?
b. What are the two project's IRRs at these same costs of capital?

(11-1) Investment Outlay
Talbot Industries is considering an expansion project. The necessary equipment could be purchased for \$9 million, and the project would also require an initial \$3 million investment in net operating working capital. The company's tax rate is 40%%.
a. What is the initial investment outlay?
b. The company spent and expensed \$50,000 on research related to the project last year. Would this change your answer? Explain.
c. The company plans to house the project in a building it owns but is not now using. The building could be sold for \$1 million after taxes and real estate commissions. How would this affect your answer?
(11-2) Operating Cash Flow
Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:
Projected sales \$10 million
Operating costs (not including depreciation) 7 million
Depreciation 2 million
Interest expense 2 million
The company faces a 40% tax rate. What is the projects operating cash flow for the first year (t=1)?

#### Solution Preview

Solutions Guide: This is meant as a solutions guide. Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

A project has an initial cost of \$52,125, expected net cash inflows of \$12,000 per year for 8 years, and a cost of capital of 12%. What is the project's NPV? (Hint: Begin by constructing a time line).

NPV = -\$52,125 + \$12,000[(1/I)-(1/(I*(1+I)N)]
= -\$52,125 + \$12,000[(1/0.12)-(1/(0.12*(1+0.12)8)]
= \$7,486.68.
Financial calculator: Input the appropriate cash flows into the cash flow register, input I = 12, and then solve for NPV = \$7,486.68.

(10-2) IRR
Refer to Problem 10-1. What is the project's IRR?

Financial calculator: Input the appropriate cash flows into the cash flow register and then
solve for IRR = 16%.

Please see the attached Excel sheet

(10-3) MIRR
Refer to Problem 10-1. What is the project's MIRR?

Please see the attached excel sheet

Financial calculator: Obtain the FVA by inputting N = 8, I/YR = 12, PV = 0, PMT = 12000, and then solve for FV = \$147,596. The MIRR can be obtained by inputting N = 8,
PV = -52125, PMT = 0, FV = 147596, and then solving for I = 13.89%.

(10-4) Profitability Index
Refer to Problem 10-1. What is the project's PI?

PV = \$12,000[(1/I)-(1/(I*(1+I)N)]
= \$12,000[(1/0.12)-(1/(0.12*(1+0.12)8)]
= \$59,611.68.

Financial calculator: Find present value of future cash flows by inputting N = 8, I/YR = 12, PMT = -12000, FV = 0, then solve for PV = \$59,611.68.

PI = PV of future cash ...

#### Solution Summary

The solution determines the NPV, investment outlays and capital budgeting.

\$2.19