Question

Question 3: Capital Budgeting

Suggested time: 30 minutes

Top Spin company is considering investing in a roof-top solar network to generate its own power. Assume that the expected annual cash inflows from new solar network will be $50,000. A $150,000 net initial investment is required and the network has five-year useful life and 18% required rate of return. Assume that the investment will occur immediately after management approves the project.

a. For making decision on whether to approve or reject the project, compute the Net Present Value (NPV) of this new investment and analyze whether it will be accepted or rejected and why. (10 marks)

b. To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)

c. Compute paypack period and analyze the result. (5 marks)

Answer 1

a.)	Annual Cash flow	50,000
	Life	5 Years
	Year	Cash Flow	Pv Factor @18%	Net Present value
	0	-150,000	1	-1,50,000
	1	50,000	0.84746	42,373
	2	50,000	0.71818	35,909
	3	50,000	0.60863	30,432
	4	50,000	0.51579	25,789
	5	50,000	0.43711	21,855
	Total	100,000		6,358
	Net Present value	$ 6,358

This Investment should be accepted because the Net Present value is Positive.

b.)

IRR

19.86%

=IRR(cashflow0to5) excel formula

IRR is more than required rate of return hence the investment should be accepted.

c.)	Payback period in years	3	Years =150000/50000
	(Initial investment /annual cash inflow )

Payback period is less than project useful life, hence the investment should be accepted.