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# NPV, IRR, MIRR, Profitability Index, Payback, Discounted Payback,

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(10-1)
NPV
A project has an initial cost of \$40,000, expected net cash inflows of \$9,000 per year for 7 years, and a cost of capital of 11%. What is the project'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 discounted payback period?
(10-7)
NPV
Your division is considering two investment projects, each of which requires an up-front 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 projects' net present values, assuming the cost of capital is 5%? 10%? 15%?
b. What are the two projects' IRRs at these same costs of capital?

#### Solution Summary

Solution helps in estimating NPV, IRR, MIRR, Profitability Index, Payback, Discounted Payback,

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## Net Present Value, Internal Rate of Return, Profitability Index, Payback Period, Discount Payback Period, and Modified Internal Rate of Return

Evaluate the following 3 projects with all of the 6 capital budgeting tools (Net Present Value, Internal rate of Return, Profitability Index, Payback Period, Discount Payback Period, Modified Internal rate of Return). Which projects would you approve? If you could do only one (assume the most you have to invest is \$500), which one would you choose and why? in other words, which project would you pick as the best:
Projected

Cash Flow Years 0 1 2 3 4 5

Project A (500) 45 55 65 175 185

Project B (250) 85 65 55 45 100

Project C (400) 175 75 75 175 25

Use 10% as the discount rate and WACC (and the IRR/MIRR hurdle rate)

*Year 0 is your initial cost outlay -- the cost of the project.

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