..ooo AT&T; 10:02 AM Cunyprod.blackboard.com Homework 5 Capital Budgeting . You
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..ooo AT&T; 10:02 AM Cunyprod.blackboard.com Homework 5 Capital Budgeting . You are considering a project with an initial cash outlay of $80,000 and expected free cash flow of S20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent a. What is the project's payback period? b. What is the project's NPV? c. What is the project's PI? d. What is the project's IRR? e. What is the project's MIRR? 2. The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbcides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following cash flows Project A Project B Initial outlay $500 Inflow year 1 700 -S5,000 a. Calculate the NPV of each project. b. Calculate the PI of each project. c. Calculate the IRR of each project. d. If there is no capital rationing constraint, which project should be selected? 3. Given the following free cash flows, determine the IRR for the three independent projects A, B, andExplanation / Answer
a. Computation of Payback Period
Initial Investment = $80000
Payback Period = 4 years.
b. Present Value of Cash Inflows = Free cash flows per year * Cumulative PVF @ 10% for 6 years
= 20000*4.355 = $87100
Cash outflow = $80000
NPV = 87100 - 80000 = $7100
c. Projects' PI = Present Value of Cash inflows/ Cash Ouflows = 87100/80000 = 1.08875
d. NPV at 15% = (20000*3.784) - 80000 = -$4320
NPV at 10% = $7100
IRR = Lower rate + [Lower rate NPV / (Lower rate NPV - Higher Rate NPV)] * Difference in rates
= 10 + [7100/(7100+4320)]*5
= 13.11%
Year Cash flows Cumulative Cash flows 1 20000 20000 2 20000 40000 3 20000 60000 4 20000 80000 5 20000 100000 6 20000 120000Related Questions
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