Question

Purpose of Assignment The purpose of this assignment is to allow the students to become familiar with and practice the measurement of Net Present Value (NPV), payback, and Weighted Average Cost of Capital (WACC) using Microsoft Excel. Assignment Steps Resources: Microsoft® Excel®, Capital Budgeting Decision Models Template, Calculate the following problems using Microsoft® Excel®: Calculate the NPV for each project and determine which project should be accepted.

Project A Project B Project C Project D Inital Outlay (105,000.000) (99,000.00) (110,000.00) (85,000.00) Inflow year 1 53,000.00 51,000.00 25,000.00 45,000.00 Inflow year 2 50,000.00 47,000.00 55,000.00 50,000.00 Inflow year 3 48,000.00 41,000.00 15,000.00 30,000.00 Inflow year 4 30,000.00 52,000.00 21,000.00 62,000.00 Inflow year 5 35,000.00 40,000.00 35,000.00 68,000.00 Rate 7% 10% 13% 18%

Your company is considering three independent projects. Given the following cash flow information, calculate the payback period for each. If your company requires a three-year payback before an investment can be accepted, which project(s) would be accepted?

Project D Project E Project F Cost 205,000.00 179,000.00 110,000.00 Inflow year 53,000.00 51,000.00 25,000.00 Inflow year 2 50,000.00 87,000.00 55,000.00 Inflow year 3 48,000.00 41,000.00 21,000.00 Inflow year 4 30,000.00 52,000.00 9,000.00 Inflow year 5 24,000.00 40,000.00 35,000.00 Using market value and book value (separately), find the adjusted WACC, using 30% tax rate. Component Balance Sheet Value Market Value Cost of Capital Debt 5,000,000.00 6,850,000.00 8% Preferred Stock 4,000,000.00 2,200,00.00 10% Common Stock 2,000,000.00 5,600,000.00 13%

Answer 1

For computation of NPV, the excel formula of NPV is used to find the present value of future cashflows. The NPV function requires the rate and range of cashflows to be selected . the initial outlay is then deducted from the value of cashflows so computed to arrive at NPV.

Payback period is the time within which the initial investment is recovered. Hence to find the payback period, we cumulate the cashflows during each year. In the given question, since we have to select the project with payback period of 3 years, one should choose Project E.

Here, the WACC is required to be computed under both Book values and market values.