Question
In: Finance
Capital Budgeting For the following two projects, determine the 1. Payback Period 2. Discounted Payback 3....
Capital Budgeting For the following two projects, determine the 1. Payback Period 2. Discounted Payback 3. Net Present Value 4. Profitability Index (Benefit-Cost Ratio) 5. Internal Rate of Return 6. Modified Internal Rate of Return Project A Project B Year Net Income Cash Flow Net Income Cash Flow 0 (15,000) (19,000) 1 5,000 6,000 3,000 4,000 2 5,000 6,000 5,000 6,000 3 5000 6,000 7,000 8,000 4 5,000 6,000 11,000 12,000 Risk Index 1.80 .60 The firm’s cost of capital ko is 15% and the risk free rate Rf is 10%. The firm assesses risk and assigns a risk index to determine a risk adjusted discount rate. An index of 1.0 would be assigned to an average risk project. To determine risk adjusted rates the firm uses the following equation: Risk Adjusted Rate (RADR) = Rf + [Risk Index (ko – Rf) Task: Rank the projects in accordance with each method of analysis..
|
|
Project A |
Project B |
||||
|
Year |
Net Income |
Cash Flow |
Net Income |
Cash Flow |
||
|
0 |
(15,000) |
(19,000) |
||||
|
1 |
5,000 |
6,000 |
3,000 |
4,000 |
||
|
2 |
5,000 |
6,000 |
5,000 |
6,000 |
||
|
3 |
5000 |
6,000 |
7,000 |
8,000 |
||
|
4 |
5,000 |
6,000 |
11,000 |
12,000 |
||
|
Risk Index |
1.80 |
.60 |
Solutions
Expert Solution
Project A :
| Year | Cash Flow | Cummulative Cashflow | Discounting factor = 1/ ( 1+ r)^n | Present value | Cummulative present value |
| 1 | 6000 | 6000 | 0.840336134 | 5042.016807 | 5042.016807 |
| 2 | 6000 | 12000 | 0.706164819 | 4236.988913 | 9279.00572 |
| 3 | 6000 | 18000 | 0.593415814 | 3560.494885 | 12839.5006 |
| 4 | 6000 | 24000 | 0.498668751 | 2992.012508 | 15831.51311 |
| Total | 15831.51311 |
Risk adjusted rated for Project A = 10 + 1.8* ( 15 - 10) = 19%
Payback period = 2 + ( 15000-12000) / 6000 = 2.5 years
Discounted payback period = 3 + ( 15000 - 12839) / 2992.01 = 3.72 years
Net present value = present value of cash inflows - initial investment = 15831.51 - 15000 = 831.51
Profitability index = Present value of cash inflows / initial invetsmnet = 15831.51 / 15000 = 1.055
Project B :
| Year | Cash Flow | Cummulative Cashflow | Discounting factor = 1/ ( 1+ r)^n | Present value | Cummulative present value |
| 1 | 4000 | 4000 | 0.884955752 | 3539.823009 | 3539.823009 |
| 2 | 6000 | 10000 | 0.783146683 | 4698.8801 | 8238.703109 |
| 3 | 8000 | 18000 | 0.693050162 | 5544.401298 | 13783.10441 |
| 4 | 12000 | 30000 | 0.613318728 | 7359.824732 | 21142.92914 |
| Total | 21142.92914 |
Payback period = 3 + ( 19000 - 18000) / 12000 = 3.08 years
Discounted payback period = 3 + ( 19000 - 13783) / 7359.82 = 3.71 years
Net present value = 21142.93 - 19000 = 2142.93
PI = 21142.93 / 19000 = 1.11
jeff jeffy answered 1 year agoRelated Solutions
Capital Budgeting Assignment For the following two projects, determine the Payback Period Discounted Payback Net Present...
Capital Budgeting Assignment
For the following two projects, determine the
Payback Period
Discounted Payback
Net Present Value
Profitability Index (Benefit-Cost Ratio)
Internal Rate of Return
Modified Internal Rate of Return
Project A
Project B
Year
Net Income
Cash Flow
Net Income
Cash Flow
0
(15,000)
(19,000)
1
5,000
6,000
3,000
4,000
2
5,000
6,000
5,000
6,000
3
5000
6,000
7,000
8,000
4
5,000
6,000
11,000
12,000
Risk Index
1.80
.60
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Internal Rate of Return
Modified Internal Rate of Return
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Project B
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Net Income
Cash Flow
Net Income
Cash Flow
0
(15,000)
(19,000)
1
5,000
6,000
3,000
4,000
2
5,000
6,000
5,000
6,000
3
5000
6,000
7,000
8,000
4
5,000
6,000
11,000
12,000
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.60
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