Capital Budgeting: cash flows on excel spread sheet

Problem Set: Capital Budgeting

Problems 1-4:

You are given the following information for a project:  The initial investment is $750,000 and the cost of capital is 10%.  The project has a six year life and the project’s cash flows are expected to be:

1.  Determine the payback period. If the payback required by the company is 3 years, what is your recommended decision on this project? 3.125 yrs - reject

2.  Determine the NPV for the project. What is your recommended decision?  258,095

3.  How much could the firm afford to pay (instead of $750,000) for the project and still decide to go forward (i.e. have an NPV>0)? Assume the cash flows are as shown for years 1-6.  1,008,095- change the initial investment until the NPV=0

4. Determine the MIRR for the project. The company requires an MIRR in excess of their cost of capital – what is your decision?  15.36% - accept

Problems 5-8:

A project that costs $5,000 has expected net cash flows over its 5 year life of:

5.  What is the payback period for the project? 1.7143 yrs

6.  What is the discounted payback period for the project if the discount rate is 8%? 1.895 yrs

7.  What is the IRR? 38.32%

8.  What is the NPV? 3,686.29

Problems 9-11:

A project has an upfront cost of $10,000 and a maintenance cost of $7,500 in year 4.  The operating cash flows from the project (not including the maintenance cost in year 4) are:

9.  Determine the MIRR if the discount rate is 8%.   15.18%

10.  Determine the NPV if the discount rate is 8%.  5,757

11.  What is the Profitability Index (if the discount rate is 8%)?  1.5757