Answer To: Microsoft Word - Capital Budgeting HW.docx BUSB-361 CapitalBudgetingProblems...
Mohammad Wasif answered on Dec 16 2021
1
Year A B C PV @ 6% Cashflow of A Cashflow of B Cashflow of C
0 $ (10,000) $ (10,000) $ (10,000) 1.0000 $ (10,000.00) $ (10,000.00) $ (10,000.00)
1 $ 5,000 $ 3,900 $ 2,600 0.9434 $ 4,716.98 $ 3,679.25 $ 2,452.83
2 $ 5,000 $ 3,900 $ 2,600 0.8900 $ 4,449.98 $ 3,470.99 $ 2,313.99
3 $ 5,000 $ 3,900 $ 2,600 0.8396 $ 4,198.10 $ 3,274.52 $ 2,183.01
4 $ 3,900 $ 2,600 0.7921 $ 3,089.17 $ 2,059.44
NPV $ 3,365.06 $ 3,513.91 $ (990.73)
IRR 16.39% 13.69% -4.16%
Year A B C Cumulative Cashflow of A Cumulative Cashflow of B Cumulative Cashflow of C
0 $ (10,000) $ (10,000) $ (10,000) $ (10,000) $ (10,000) $ (10,000)
1 $ 5,000 $ 3,900 $ 2,600 $ (5,000) $ (6,100) $ (7,400)
2 $ 5,000 $ 3,900 $ 2,600 $ - 0 $ (2,200) $ (4,800)
3 $ 5,000 $ 3,900 $ 2,600 $ 5,000 $ 1,700 $ (2,200)
4 $ 3,900 $ 2,600 $ 5,600 $ 400
Payback 2.00 2.56 3.85
Independent: Do project A and B but not C
Mutually Exclusive: Project B
Year A B C PV @ 15% Cashflow of A Cashflow of B Cashflow of C
0 $ (10,000) $ (10,000) $ (10,000) 1.0000 $ (10,000.00) $ (10,000.00) $ (10,000.00)
1 $ 5,000 $ 3,900 $ 2,600 0.8696 $ 4,347.83 $ 3,391.30 $ 2,260.87
2 $ 5,000 $ 3,900 $ 2,600 0.7561 $ 3,780.72 $ 2,948.96 $ 1,965.97
3 $ 5,000 $ 3,900 $ 2,600 0.6575 $ 3,287.58 $ 2,564.31 $ 1,709.54
4 $ 3,900 $ 2,600 0.5718 $ 2,229.84 $ 1,486.56
NPV $ 1,416.13 $ 1,134.42 $ (2,577.06)
IRR 7.28% 4.79% -11.66%
A is better than B since the payments for B (on average) are coming farther in the future and so are more heavily discounted by the higher interest rate.
2
For Machine A
Initial Cost $ 10,000
Discounted Rate 9%
Number of Years 10
Maintenance Costs $ 200
Present Value $1,283.53
Total Cost $ 11,283.53
For Machine B
Initial Cost $ 11,000
Discounted Rate 9%
Number of Years 10
Maintenance Costs $ 100
Present Value $641.77
Total Cost $ 11,641.77
A is economical. If B sold for 11,641.76 they would have the same cost
3
Interest Rate 11%
Year Cost PV @ 11% Total Cashflow
0 $ 2,000,000 1 $ 2,000,000.00
1 $ 2,000,000 0.9009009009 $ 1,801,801.80
2 $ 2,000,000 0.8116224332 $ 1,623,244.87
NPV $ 5,425,046.67
For Benefits:
i 11%
n 10
PMT $ 800,000
Present Value $ 4,711,385.61
To convert the year 2 pv to year 0 PV $ 3,823,866.25
NPV $ (1,601,180.42)
Since,, NPV is negative. Hence, do not develop the drug
4
Interest Rate 7%
Year Cashflow PV PV of Cashflow
0 $ (100,000) 1 $ (100,000.00)
1 $ 30,000 0.9345794393 $ 28,037.38
2 $ 30,000 0.8734387283 $ 26,203.16
3 $ ...