For each project, calculate the NPV, IRR, profitability index (PI) and the payback period. For each capital
Question:
For each project, calculate the NPV, IRR, profitability index (PI) and the payback period. For each capital budgeting decision tool, indicate if the project should be accepted or rejected, assuming that each project is independent of the others. Important Note: The venture capital folks, when considering payback period, have a firm maximum payback period of three years. This3-year payback period has no impact on other capital budgeting analysis techniques, each is to be considered on its own. In other words, yes, all cash flows need to be considered for NPV, IRR, and PI.
Expected cash flows for the four potential projects that Julliard is considering as shown below (each project ends when its cash flows end):
Year | Project A | Project B | Project C | Project D |
0 | -$8,000,000 | -$8,000,000 | -$8,000,000 | -$7,000,000 |
1 | $3,500,000 | $3,500,000 | $2,000,000 | $2,500,000 |
2 | $2,500,000 | $2,500,000 | $2,000,000 | $2,500,000 |
3 | $2,000,000 | $2,000,000 | $2,000,000 | $2,100,000 |
4 | $1,000,000 | $1,000,000 | $1,500,000 | $1,500,000 |
5 | $1,000,000 | $1,000,000 | $1,500,000 | $500,000 |
6 | $1,500,000 | $500,000 | ||
7 | $1,000,000 | $500,000 | ||
8 | $500,000 | |||
9 | $500,000 | |||
10 | $500,000 |
I have provided a suggested template for your final answers. Below the grid is where you should show all your required backup calculations (this means your cash flow register inputs, the interest rate, PI calculation and cumulative cash flows for payback). If you are working this in Excel, feel free to submit your Excel sheet, where the equations in the cells will provide the required backup. Be sure to clearly indicate the required rate of return for each project.
Remember that each capital budgeting method should be calculated and analyzed on a stand-alone basis.
Year | Project A | Project B | Project C | Project D | ||
Req. Return (use 2 decimals xx.xx%) | ||||||
4a | NPV (to nearest $1) | |||||
4b | NPV accept/reject | |||||
5a | IRR (xx.xx%) | |||||
5b | IRR accept/reject | |||||
6a | PI (show 2 decimals, x.xx) | |||||
6b | PI accept/reject | |||||
7a | Payback Period (x.x years) | |||||
7b | Payback accept/reject |
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston