Question

Mary is analyzing a capital budgeting project with the following data:

Cost of packaging machine 5 million

Annual straight line depreciation over 5 years $1,000,000

Salvage value 200k

Working capital 5% of CF’s per year with no initial working capital

Operating income 1.2million with a 20% tax rate

What is the IRR, the MIRR, the NPV at a 6.35% WACC, and the payback period?

Answer 1

1.         Payback Period (PBP)

            One of the most popular and widely recognized traditional methods of evaluating capital investment proposal is the payback period. It is the number of years it takes a firm to recover its original investment from net cash flows. The payback period of an investment is the length of time required for the cumulative total net cash flows from the investment to equals to total initial cash outlays.

General Rule – Earlier the better.

2.         Net Present Value (NPV)

            It is the Present value of the projects net cash flows discounted at the company’s cost of capital to the time of the initial capital outlay, minus that initial capital outlay.

General Rule – Higher the NPV, better it is.

3.         Internal rate of Return (IRR)

            IRR is the rate of return at which present value of cash inflows equals to present value of cash outflows.

General Rule – Higher the better.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.