Question

6	Given, the series of Cask Flows and an assumed Capital Cost of 12%,please calculate the below Capital Budgeting components.
	5.)	*Assumed Capital Cost	12%
		Projected Cash Flows	PROJECT A	PROJECT B	PROJECT C
	Year
	0		$                          (115,000)	$               (111,000)	$              (99,000)
	1		$                               71,000	$                   58,000	$                50,000
	2		$                               64,500	$                   64,000	$                64,500
	3		$                            100,000	$                 101,000	$              102,000
	a.	Payback
	b.	Internal Rate of Rerturn
	c.	Net Present Value
	d.	Modified Internal Rate of Return
	e.	WHICH PROJECT IS MOST ADVANTAGEOUS?

Answer 1

Part-a:

Payback of Project-A = 1 + (44,000/64,500)

= 1 + 0.68217

= 1.68217

= 1.68 years.

.

Payback of Project-B = 1 + (53,000/64,000)

= 1 + 0.82813

= 1.82813

= 1.83 years

.

Payback of Project-C = 1 + (49,000/64,500)

= 1 + 0.75969

= 1.75969

= 1.76 years

.

.

Part-b:

At IRR,
Present Value of Cash Outflow = Present Value of Cash Inflow

.

IRR of Project – A:

115,000 = 71,000/(1+IRR)^1 + 64,500/(1+IRR)^2 + 100,000/(1+IRR)^3

Computing for IRR ,

We get IRR = 43.26%

.

Therefore, IRR of Project –A is 43.26%

.

.

IRR of Project – B:

111,000 = 58,000/(1+IRR)^1 + 64,000/(1+IRR)^2 + 101,000/(1+IRR)^3

Computing for IRR ,

We get IRR = 39.93%

.

Therefore, IRR of Project –B is 39.93%

.

.

IRR of Project – C:

99,000 = 50,000/(1+IRR)^1 + 64,500/(1+IRR)^2 + 102,000/(1+IRR)^3

Computing for IRR ,

We get IRR = 44.72%

.

Therefore, IRR of Project –C is 44.72%

.

.

.

Part-c:

NPV of Project-A:

{1}	{2}	{3}	{4}	{5}	{6} = {2}*{5}
Year	Projected Cash Flows	Cummulative Cash Flows	DF Working	Discounting Factor	Present Value
0	(115,000)	(115,000)	1	1	(115,000)
1	71,000	(44,000)	1/1.12^1	0.892857143	63,393
2	64,500	20,500	1/1.12^2	0.797193878	51,419
3	100,000	120,500	1/1.12^3	0.711780248	71,178
				NPV:	70,990

NPV of Project-B:

{1}	{2}	{3}	{4}	{5}	{6} = {2}*{5}
Year	Projected Cash Flows	Cummulative Cash Flows	DF Working	Discounting Factor	Present Value
0	(111,000)	(111,000)	1	1	(111,000)
1	58,000	(53,000)	1/1.12^1	0.892857143	51,786
2	64,000	11,000	1/1.12^2	0.797193878	51,020
3	101,000	112,000	1/1.12^3	0.711780248	71,890
				NPV:	63,696

NPV of Project-C:

{1}	{2}	{3}	{4}	{5}	{6} = {2}*{5}
Year	Projected Cash Flows	Cummulative Cash Flows	DF Working	Discounting Factor	Present Value
0	(99,000)	(99,000)	1	1	(99,000)
1	50,000	(49,000)	1/1.12^1	0.892857143	44,643
2	64,500	15,500	1/1.12^2	0.797193878	51,419
3	102,000	117,500	1/1.12^3	0.711780248	72,602
				NPV:	69,663

.

.

.

Part-e:

Project – A is most advantageous as it has the highest NPV and a lower payback period among all the three projects.