# Accounting: Capital budgeting and Decision Making

The attached spreadsheet has the inputs and capital budget net cash flows analysis for an investment of $1,000,000 over 10 years, with a WACC of 7.67%.

1) Calculate the Net Present Value, IRR, Profitability Index and Payback Years for this capital budget.

2)Prepare a scenario analysis with the following data:

a) Base Case (average scenario)= 25,000 units sold per year= 55% probability

b) Worst case scenario= 18,750 units sold per year- 25% probability

c) Best Case scenario= 31,250 units sold per year- 20% probability

d) Determine the scenario analysis for NPV and IRR?

e) What does the Risk assessment tell you about the project?

https://brainmass.com/business/financial-ratios/accounting-capital-budgeting-decision-making-571808

## SOLUTION This solution is **FREE** courtesy of BrainMass!

1) Calculate the Net Present Value, IRR, Profitability Index and Payback Years for this capital budget.

Base Case Scenario

Net present value (NPV) ($442,945.70)

IRR -1.93%

Profitability index 0.56

Payback period >10 Years

2) Prepare a scenario analysis with the following data:

a) Base Case (average scenario)= 25,000 units sold per year= 55% probability

b) Worst case scenario= 18,750 units sold per year- 25% probability

c) Best Case scenario= 31,250 units sold per year- 20% probability

Base Case Scenario

Net present value (NPV) ($442,945.70)

IRR -1.93%

Profitability index 0.56

Payback period >10 Years

Worst case scenario

Net present value (NPV) ($610,451.11)

IRR -6.45%

Profitability index 0.39

Payback period >10 Years

Worst case scenario

Net present value (NPV) ($275,440.29)

IRR 2.01%

Profitability index 0.72

Payback period 9 Years, 6 Months

d) Determine the scenario analysis for NPV and IRR?

CASE NPV IRR PROBABILITY

Base ($442,945.70) -1.93% 55%

Worst case ($610,451.11) -6.45% 25%

Best case ($275,440.29) 2.01% 20%

Expected IRR -2.27%

Expected NPV ($451,320.97)

The above table shows the possible scenarios, they associated probabilities and the eventual expected outcome value of all the scenarios. From the information, three scenarios exist from which one expected outcome most be provided.

From the above computations, you will observe that the expected NPV is a negative value along with the IRR. This means that the project is not expected to be profitable. Since its future cash flows are less than the amount spent the project's IRR was also unfavorable.

e) What does the Risk assessment tell you about the project?

The risk assessment shows that the project will not be profitable for the firm making the investment. Net present value attempts to determine the profit of discounted cash flows against an initial outlay.

The computations show that the project will not be profitable and should not be undertaken.

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