Yr
Sates of Affairs
Cash Flow
Mcarthys
Cash Flow
Gotham
Cash Flow
0
-$7,500,000
-$5,000,000
-$4,000,000
1
$5,000,000
$1,000,000
$5,750,000
2
$4,500,000
$2,000,000
$5,750,000
3
$3,000,000
$3,000,000
-$1,000,000
4
-$1,000,000
$4,000,000
$0.00
5
$2,500,000
$4,000,000
6
$2,500,000
Required rate of return: 8.00%
Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?
Calculate the Net Present Value of each project. Which projects should we accept?
Calculate the Internal rate of return for each project. Which projects should be accepted?
Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?
Calculated the Profitability Index for each project. Which projects should be accepted?
If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?
| Yr | Sates of Affairs Cash Flow | Mcarthys Cash Flow | Gotham Cash Flow | |
| 0 | -$7,500,000 | -$5,000,000 | -$4,000,000 | |
| 1 | $5,000,000 | $1,000,000 | $5,750,000 | |
| 2 | $4,500,000 | $2,000,000 | $5,750,000 | |
| 3 | $3,000,000 | $3,000,000 | -$1,000,000 | |
| 4 | -$1,000,000 | $4,000,000 | $0.00 | |
| 5 | $2,500,000 | $4,000,000 | ||
| 6 | $2,500,000 | |||
Required rate of return: 8.00%
Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?
Calculate the Net Present Value of each project. Which projects should we accept?
Calculate the Internal rate of return for each project. Which projects should be accepted?
Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?
Calculated the Profitability Index for each project. Which projects should be accepted?
If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?
Related questions
You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value
| Year | Project(A) | Project (B) |
| 0 | -$30,000 | -$25,000 |
| 1 | 10,000 | 8,000 |
| 2 | 11,000 | 8,000 |
| 3 | 12,000 | 8,000 |
| 4 | 13,000 | 8,000 |
The required rate of return is 10%.
(a) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.
(b) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.
(c) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.
(d) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.
(e) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.
(f) Find the crossover rate. Show the equation.
(g) Sketch the NPV profile. You must plot at least 5 points for the profile: two points on the x and y axis each, and the cross-over rate on the x axis.
Q6) Assume yourself as a financial analyst for the Great Land Company. Then, the director of capital budgeting asks you to analyse two proposed capital investments named Project A and Project B. Each project has a cost of 900,000 birr, and the cost of capital (the required rate of return) for each project is 10%. The information on the projects’ expected net cash flows are as follows with the present value of 1 birr at 10%.
|
Year |
Cash flow of the projects in Birr |
PV of 1birr at 10% |
|
|
Project A |
Project B |
||
|
0 |
- 900,000 |
- 900,000 |
1 |
|
1 |
400,000 |
245,000 |
0.909 |
|
2 |
350,000 |
245,000 |
0.826 |
|
3 |
250,000 |
245,000 |
0.751 |
|
4 |
150,000 |
245,000 |
0.683 |
|
5 |
100,000 |
245,000 |
0.621 |
Required:
- Calculate each project’s payback period (PBP) and determine which project is preferable as per PBP results. (2 pts)
- Calculate each project’s net present value (NPV). (2 Pts)
- Determine and justify which project or projects should be accepted as per NPV results if they are independent projects. (2Pts).
- Determine and justify which project or projects should be accepted as per NPV if they are mutually exclusive projects. (2Pts).
- Calculate the internal rate of return (IRR) for each project and determine whether the projects are accepted or rejected as per IRR result and also determine which project is preferable based on IRR. (2Pts)
- Discuss the relative strengths and limitations of the capital budgeting decision criteria that you have used above (Payback period, NPV and IRR).( 3Pts)
