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# Capital Budgeting : NPW and IRR methods

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University Athletic Wear (UAW) is evaluating several new product proposals. Resources are available for any or all of the products . UAW uses a MARR of 15% and a time span of 5 years for project evaluations. Determine which new product(s) should be chosen using Internal rate of return criteria.

MARR=15%
Investment Cash Flows
Project 1 2 3 4 5
Shorts (\$450,000) \$80,000 \$120,000 \$150,000 \$150,000 \$150,000
Shirts (\$200,000) \$50,000 \$70,000 \$80,000 \$80,000 \$80,000
Jackets (\$500,000) \$150,000 \$150,000 \$150,000 \$150,000 \$150,000

a. Determine which new product(s) should be chosen using the Internal rate of return criteria.

b. Determine which new product(s) should be chosen using the present worth criteria.

https://brainmass.com/economics/personal-finance-savings/capital-budgeting-npw-and-irr-methods-461474

#### Solution Preview

Please refer attached file for better clarity of tables and formulas.

a Determine which new product(s) should be chosen using the Internal rate of return criteria.

Year Shorts Shirts Jackets
Initial (\$450,000) (\$200,000) (\$500,000)
1 \$80,000 \$50,000 \$150,000
2 \$120,000 \$70,000 \$150,000
3 \$150,000 \$80,000 \$150,000
4 \$150,000 \$80,000 \$150,000
5 \$150,000 \$80,000 \$150,000

We can use IRR function in MS Excel to IRR for the projects
IRR for "Shorts"=12.35% =IRR(B5:B10)
IRR for "Shirts"=21.52% =IRR(C5:C10)
IRR for "Jackets"=15.24% =IRR(D5:D10)
IRR is above 15% for ...

#### Solution Summary

Solution chooses the appropriate investment proposal/s.

\$2.19

## What is the net present value of investment?

Problem 1
A firm has the following investment alternatives. Each one lasts a year.

Investment A B C
Cash inflow \$1,150 \$560 \$600
Cash outflow \$1,000 \$500 \$500

The firm's cost of capital is 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive.
a. What is the net present value of investment A? Investment B? Investment C?
b. What is the internal rate on investment A? Investment B? Investment C?
c. Which investment(s) should the firm make? Why?
d. If the firm had unlimited sources of funds, which investment(s) should it make? Why?
e. If there were another alternative, investment D, with an internal rate of return of 6 percent, would that alter your anser to question (d)? Why?
f. If the firm's cost of capital rose to 10 percent, what effect would that have on investment A's internal rate of return?

Problem 2

If the cost of capital is 9 percent and an investment costs \$56,000, should you make this investment if the estimated cash flows are \$5,000 for years 1 through 3, \$10,000 for years 4 through 6, and \$15,000 for years 7 through 10?

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