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 have a firm maximum payback period of four years.
Expected cash flows for the four potential projects that Belfry is considering as shown below:
Year | Project A | Project B | Project C | Project D |
0 | -$8,250,000 | -$7,000,000 | -$6,000,000 | -$5,500,000 |
1 | $1,250,000 | $2,000,000 | $2,000,000 | $1,400,000 |
2 | $1,500,000 | $2,000,000 | $2,000,000 | $1,500,000 |
3 | $2,000,000 | $2,000,000 | $2,000,000 | $1,000,000 |
4 | $2,500,000 | $2,000,000 | $1,500,000 | $1,000,000 |
5 | $2,500,000 | $1,200,000 | $500,000 | $1,000,000 |
6 | $2,500,000 | $500,000 | $1,000,000 | |
7 | $2,000,000 | $500,000 | $500,000 | |
8 | $500,000 | $500,000 | ||
9 | $250,000 | |||
10 | $250,000 |
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 on 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(provided below).
Year | Project A | Project B | Project C | Project D | ||
Req. Return (use 2 decimals xx.xx%) | 13.55% | 12.70% | 16.10% | 9.30% | ||
NPV (to nearest $1) | ||||||
NPV accept/reject | ||||||
IRR (xx.xx%) | ||||||
IRR accepts/reject | ||||||
PI (show 2 decimals, x.xx) | ||||||
PI accepts/reject | ||||||
Payback Period (x.x years) | ||||||
Payback accept/reject | ||||||
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston