Given an initial asset investment of $3 million, and projected cash flows of $70

Question

Given an initial asset investment of $3 million, and projected cash flows of $700,000 per year for five years, and with a discount rate of 8%:

a)      Calculate NPV, P.I., IRR, and payback:

b)      Would you accept this project? Why/why not:

c)      What are the primary weaknesses of the NPV capital budget decision:

d)     If the project required an increase in working capital (WC), how would you include WC into your budget decision?

e)      What are the significant differences between the NPV and IRR capital budgeting methods?

Explanation / Answer

PI = 3205103/3000000 = 1.07 answer

Payback period = 4 yrs + 200000/700000 = 4.28 years answer

(b) The project should be accpeted as it has positive NPV

(c) In case of mutually exclusive projects it is not helpful

(d) we would iinclude only the increase in wc in the capitl budget decision

Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Cash outflow 3000000




Cash inflow
700000 700000 700000 700000 700000 Discounnting
0.925926 0.857339 0.793832 0.73503 0.680583 Poresent value 648148.1 600137.2 555682.6 514520.9 476408.2 NPV




205103

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