** Please see the attached file for the data **
Calculate payback, internal rate of return (IRR), modified internal rate of return (MIRR), and net present value (NPV), and make a recommendation whether the company should open the mine based on your calculations.© BrainMass Inc. brainmass.com December 24, 2021, 10:02 pm ad1c9bdddf
SOLUTION This solution is FREE courtesy of BrainMass!
Please see the attached excel document.
Learning about Important concepts
Capital budgeting involves making decision about the long term mix of the composition of assets of the business. As per Zen Wealth, "Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost.
The following Capital Budgeting decision rules will be presented:
- Payback Period
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
- Profitability Index
It is the period in which initial investments are recovered. Payback helps in knowing about the recovery period of the investments put into the project. Lower payback period is desirable.
Net Present value gives the value addition by the project. It is calculated by:
NPV= Present value of Future cash flows- Initial investments
Internal rate of return refers to the return earned from the project. At IRR, NPV= zero.
It takes care of opportunity costs at the WACC
= Present value of inflows/Outflows
As per zenwealth, "A Capital Budgeting decision rule should satisfy the following criteria:
- Must consider all of the project's cash flows.
- Must consider the Time Value of Money
- Must always lead to the correct decision when choosing among Mutually Exclusive Projects."
Hence as per the above criteria, NPV will be the best method of selection of the project.
Analysis of Our Case study
One can accept the project as NPV is $9,95,20,048 which is indicating positive value addition by the project.
Its IRR is more than WACC and PI is also positive.
One can accept the project as NPV is $3,86,92,769 which is indicating positive value addition by the project.
Its IRR is more than WACC and PI is also positive.© BrainMass Inc. brainmass.com December 24, 2021, 10:02 pm ad1c9bdddf>