Question

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41 Capital Budgeting Exercises: Inree independent projects are under consideration for capital budgeting purposes. Their respective initial investment, cost of capital, and cash flows are provided below. Use the following capital budgeting techniques to evaluate all three projects and indicate which project should be undertaken, assuming there is no budget constraint A. Payback period method Discounted payback period method Net present value method IRR method B. C. D. Project 1 Project 2 Project 3 Initial Investment Cost of Capital Target payback period $120,000 $130,000 $150,000 9% 7% 10% 4 years 4 years years Cash flows $33.000 33,000 33,000 30,000 30.000 Year 1 Year 2 Year 3 Year 4 $30,000 30,000 30,000 35,000 35,000 S35.000 35,000 45,000 45,000 45,000 Year 5 Capital Budgeting Spreadsheet Example ASSIGNMENT# NAME: LAB TIME: Answer Sheet for Capital Budgeting Exercises From Previous Page Project 2 Project 3 Which project(s) should be accepted? Project 1 Payback period Discounted payback period NPV IRR

Answer 1

Answer : Analysis of Project - 1 Initial outlay = $1,20,000 Cost of Copital = 9% Colculation of Present Value of Cosh In flow (PVCI) Years Cash flow 30,000 30, con 30,000 35 ooo 35 000 Presentvale factor @gi 0.9174 0.8417 0.7722 0.7084 -0.6499 Present Value 27,522 25,251 23,166 24794 22,746.5 1,23,479.50 Total NPV = 2 PVCI - Initial Outlay 1,23,479.50 -1,20, y = + $ 3.479,50 Yoor Cash flows is we Commulative 30,000 60,000 go,000 1,25,000 1,60,000 Cummulative Discounted Cashflows. 27522 52,773 75,939 100,733 1,23479.5 • Pay back period 3 yearst 30,000 - 3.857 years. 35 ouro • Discounted Pay back Period 4 years + 19,267 - 4.847 years 22746.5.

Celculation of IRR NPY @ 9% Discount Rete = + 3479.50 yeor Colculation of NPV @ 11% Discount Rote CES PVF a U 30,000 0.9009 30,000 30,000 0.7312 350ro 0.6587 5 3500 0.5935 0.8116 IM Jn Prosent Value 27,027 24,348 21,936 23,054.5 20725 1, 17, 138.00 Total NPV = 1 17,138 - 1,20,00 - 2,862 Through Interpolation Method Discount Rote NPV. 3479.50 -2862 6,341.5 Difference 2 IRR = gr.+ 2 6341.5 x 3479.50 10.097%

Analysis of Project - 2 Initial Outlay- Present Value of Cosh out flow (PVco): $1,30,000 Calculation of AVCI, Cummulative Cosh flows & Discounted Commulative Cosh flows (A) Cummistive Present Value AxR) Commulative Discounted Your Cashflows Cash Flows Factor@ 7%. Present Value Cosh flows 3 3.000 33,000 0.9346 30.841.8 30,841,80 33.00 66,00 0.8734 28,822.2 59,664.00 33,0210 99.06 0.8163 26,937.9 86, 601.90 30,000 1,29,000 0.7629 22,887 1,09,488.90 5 30,000 1,59,000 0.7130 2 1,390 1,30,878.90 Total 1,30,878.90 • NPV = PUCI - PICO > 1,30,878.90 -1,30,000 $878.90 • Pay back Period - 4 years + 1,000 - 4.03 years 30,000 • Discounted Payback period 4 years + 20,511.1 - 4.958 years 21,390 Colculation of IRR Colultion of PVCI using discount Rote @ 8% . Year CFS Present Value Foctor @8% Present value 33,000 0.9259 30554.7 33.000 0.8573 28,290.3 33,000 0.7938 26, 195.4 30,000 0.7350 22,050 390010 0.6806 20,418 Total 1,27,509 ባ ባ ባ ባ ላ (

NPV @ 8% discount Rote - $2491.00 Through interpolation: Rete NPV 878.90 -2491 3,369.9 Difference 1% IRR Rote 7% + 1% X 878.90 3, 369.9 - 7.26% Analysis of Project - 3 Initial outlay - Puco = 1,50,000 Celculation of PVCI, Commulative Coonflows, Commulative Discounted Cashflows Cummulative Prosent Value Cummultive Year Cashflows Cash flows foctor @ 10% Present Value Discounted CFs. I 35,000 35,000 0.9091 31818.5 31.818.50 35,000 7oou 0.8264 28924 60,742.50 45,000 0.7513 33,808.5 g4, 551.00 45,000 0.683 30735 1,25,286 4500 2,05,000 0.620g 27940.5 153226.50 Total 1,53,226.50 ut we 11500 1,60,000 . NPV = PVCI - PVCO » 153,226.50 - 450,00 + $ 3,226.50 45 000 = • Poy back Period: 3 years + 35,000 Discounted Payback Period - Yyears + 24414 - 3. 7 years - 4.88 years

315315 Colculation of IRR Colcultion of PVCI @ Discount Role = 11 Yeor PvFQ 11%. Present values 35,000 0.9009 39000 0.8116 28406 45,00 0.7312. 32904 45,000 0.6587 296415 45,000 0.5935 267075 Total 1,49,190.50 - رو با کم NPV = PVCI - PVCO = 1,49,190,50 - 150,000 = - $ 809.50 Through Interpolation Rote 10% NAV 3226.5 - 809.50 4036 IRR Rote = lont 1% 4036 X 3226.5 10.79%