Question

Assignment #4 The purpose of this assignment is to solidify your understanding on the capital budgeting techniques (mainly Net Present Value and Internal Rate of Return). The scores of this assignment will help in assessing the following learning goal of the course: "students successfully completing this course will be able to apply capital budgeting techniques to evaluate long term investment decisions of firm. Instructions: You are required to use a financial calculator or spreadsheet (Excel) to solve the following capital budgeting problem (sample questions and solutions are provided for guidance): Windrunner Corp. is considering a new machine that requires an initial investment of $800,000 installed, and has a useful life of 10 years. The expected annual after-tax cash flows for the machine are $120,000 during the first 5 years, $150,000 during years 6 through 8 and $180,000 during the last two years. (1) (ii) (iii) Develop the timeline (linear representation of the timing of cash flows) Calculate the Internal Rate of Return (IRR) Calculate the Net Present Value (NPV) at the following required rates of retum: (a) 9% (b) 10% (c) 11% (d) 12% Using IRR and NPV criterion, comment if the project should be accepted or rejected at the following required rates of return: (a) 9% (b) 10% (c) 11% (d) 12% Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis). (iv) (v)

Answer 1

THE FIRST IMAGE ANSWERS THE PART 1, THE SECOND AND THIRD IMAGES SHOW CALCULATION ALONG WITH EXCEL FORMULAS FOR QUESTION PARTS 2,3 AND 5

ANSWER TO QUESTION PART 4

IRR CRITERION

SINCE THE IRR OF 10.857 IS HIGHER THAN 9% AND 10% RESPECTIVELY THE PROCJET CAN BE ACCEPTED AT 9% AND 10% REQUIRED RATE OF RETURN

SINCE THE IRR OF 10.857 IS LOWER THAN 11 AND 12% RESPECTIVELY THE PROCJET CANNOT BE ACCEPTED AT 11% AND 11% REQUIRED RATE OF RETURN

NPV CRITERION

SINCE THE PROJECT NPV IS POSITIVE AT 9% AND 10% RESPECTIVELY THE PROCJET CAN BE ACCEPTED AT 9% AND 10% REQUIRED RATE OF RETURN

SINCE THE PROJECT NPV IS NEGATIVE  AT 11% AND 12% RESPECTIVELY THE PROCJET CANNOT BE ACCEPTED AT 11% AND 12% REQUIRED RATE OF RETURN

LINEAR REPRESENTATION Of TIMINGD OF 6 ASH FLOW YEAR 2 8100,000) 1 120000 29000 12000 120000 120po0 I5go00 ISpe00 159000 Re00 0 CASEH F1ow rISTTJA /ponp/y

NPV AND IRR.x Isx hemant daroga X Excel Developer Help Page Layout Review Tell me what you want to do Share File Home Insert Formulas Data View Cut AutoSum- As A A E= Percentage Calibri Wrap Text V11 E Copy Paste NFill Insert Delete Format в I U Merge & Center Conditional Format as Cell Sort & Find & .0 00 00 0 A Format Painter Clear Formatting Table Styles Filter Select Clipboard Font Alignment Number Styles Cells Editing fox =IRR(C3:C13,6) C14 X I A В C. D F G Н K L P 1 YEAR 2 CASH FLOW (800000) 3 0 120000 4 1 5 2 120000 NPV PROFILE 120000 6 3 7 4 120000 80000 120000 8 5 60000 9 6 150000 150000 10 7 40000 11 150000 12 9 180000 20000 13 10 180000 0 10.857% 14 IRR 110 12% 9% 10% 15 (20000) REQUIRED RATE NPV (40000) 16 OF RETURN 9% 72444.27487 17 (60000) 10% 18 32250.69001 11% (5198.831352) 19 12% (40132.33396) 20 21 22 Sheet1 100%

NPV AND IRR.x Isx hemant daroga Excel Developer Page Layout Review Help Tell me what you want to do Share File Home Insert Formulas Data View Cut AutoSum- As A A Calibri a Wrap Text V11 Custom P Copy Paste NFill Insert Delete Format в I U Conditional Format as Cell Sort & Find & 0 00 00 0 A- Merge & Center Format Painter Clear Formatting Table Styles Filter Select Font Clipboard Alignment Number Styles Cells Editing fox C3+NPV(B17,C4:C13) C17 X I A В C. D F G H K L P 1 YEAR 2 CASH FLOW (800000) 3 0 120000 4 1 5 2 120000 NPV PROFILE 120000 6 3 7 4 120000 80000 120000 8 5 60000 9 6 150000 150000 10 7 40000 11 150000 180000 12 9 20000 180000 13 10 0 10.857% 14 IRR 110 12% 9% 10% 15 (20000) REQUIRED RATE NPV (40000) OF RETURN 16 9% 72444.27487 17 (60000) 10% 18 32250.69001 11% (5198.831352) 19 (40132.33396) 12% 20 21 22 Sheet1 100%