# NPV, Investment Outlays, and Capital Budgeting

(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 projectÃ¢??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)?

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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.