Capital budgeting

Capital budgeting

Part 1 calculation of IRR and NPV

-815000

1%

4%

10%

18%

year 1

141000

139604

135576.9231

128181.8

127027

year 2

320000

313694.7

295857.9882

316831.7

288288.3

year 3

440000

427059.7

391158.3978

435643.6

396396.4

SUM

880358.4

822593.3091

880657.1

811711.7

NPV

65358.36

7593.309058

65657.07

-3288.29

IRR

4%

4%

4.4184

4.184

Graph of NPV and discount rate

This graph indicates that proposed investment project is generating positive NPV at discount rate 1,4 and 10, and negative NPV at discount rate 18 percent, which means that one could finalized its investment decision between discount rate 1-10 percent. Meanwhile, this graph further indicates that 18 percent is the discount rate at which the curve intersects the horizontal axis.

B) Calculate NPV using profitability index

Initial investment = $4.2m

Profitability index = 0.94

NPV =?

Solution

PI = 1+ NPV/Initial investment

0.94 = 1+NPV/4.2M

-0.06 * 4200000 = NPV

NPV = -252000

Part 2) ...