Question

Assume that the cost of capital (discount rate) for the question that follows is equal to 0.14 (this is a decimal not a percentage).

Consider the following capital budgeting project.

You are considering investing in a business that will cost $200,000 and will create free cash flows at the rate of $30,000 per year for the next 10 years. Your cost of capital was given in the first question. Use that cost of capital in this question.

Within EXCEL compute the following and attach your file to this post.

What is the payback of the project? If you require a payback under 7 years do you accept or reject the project?

What is the discounted payback of the project? If you require a discounted payback under 7 years do you accept or reject the project?

What is the internal rate of return of the project? Do you accept or reject the project given your cost of capital?

What is the MIRR of the project? Do you accept or reject the project given your cost of capital?

What is the NPV of the project? Do you accept or reject the project?

Within the EXCEL spread sheet create a NPV profile of the project using interest rates from 0 to 20% at increments of 1%.

Answer 1

Below is the analysis of the case study

	0	1	2	3	4	5	6	7	8	9	10
Initial cost	-200,000
Revenues		30,000	30,000	30,000	30,000	30,000	30,000	30,000	30,000	30,000	30,000
Discount factor		1.1	1.3	1.5	1.7	1.9	2.2	2.5	2.9	3.3	3.7
Discounted revnue		26,316	23,084	20,249	17,762	15,581	13,668	11,989	10,517	9,225	8,092
Payback	6 years 8 months
Discounted cash flow in 7 years	128,649
Hence we reject
IRR	8%
Reject	IRR < CoC
NPV	(43,517)
We reject based on NPV