EBF 2054 Financial Management Tutorial 6: Capital Budgeting

Tapley Dental Associates is considering a project that has the following cash flow and WACC
data. What is the project's NPV? Should the project's accepted or rejected base on the
projected NPV? Why?
WACC = 10%
Year:
0
1
2
3
4
5
Cash flows:
-$1,000
$300
$300
$300
$300
$300
300

1( 1+ 0.1 )5
=1,137.24
0.1

NPV =1,137.241,000=137.24
The projects accepted base on the projected NPV because NPV>0.
2

Blanchford Enterprises is considering a project that has the following cash flow data. What
is the project's IRR? WACC is 15%. Should the project's accepted or rejected base on the
projected IRR? Why?
Year:
0
1
2
3
Cash flows:
-$1,000
$450
$450
$450
0=450

1( 1+ x )3
1,000
x

When x=15

1( 1+0.15 )
450
0.15

1,000=27.45

When x=17
450

1( 1+0.17 )3
1,000=5.69
0.17

27.450
15x
=
5.6927.45 1715
1.6566=15 x

x=16.66

The projects accepted base on the projected IRR because IRR>NPV.

Tapley Dental Associates is considering a project that has the following cash flow data.
What is the project's payback?
Year:
0
1
2
3
4
5
Cash flows:
-$1,000
$300
$310
$320
$330
$340
1 ,000( 300+310+320 ) =70
3+

70
=3.21 years
330

Richards Enterprises is considering a project that has the following cash flow and WACC
data. What is the project's NPV? Should the project's accepted or rejected base on the
projected NPV? Why?
WACC = 10%
Year:
0
1
2
3
4
5
Cash flows:
-$1,000
$400
$395
$390
$385
$380
400 395 390 38 5 380
+
+
+
+
=1,482
1.1 1.12 1.13 1.1 4 1.15
NPV =1,4821,000=482

The projects accepted base on the projected NPV because NPV>0.

5

Reynolds Bikes is considering a project that has the following cash flow and WACC data.
What is the project's discounted payback?
WACC = 10%
Year:
0
1
2
3
4
Cash flows:
-$1,000
$525
$485
$445
$405
525
=477.27
1.1
485
=400.83
1.12

445
=334.34
3
1.1
1,000( 477.27+400.83 )=121.9
2+

121.9
=2.36 years
334.34

Edison Electric Systems is considering a project that has the following cash flow and WACC
data. What is the project's MIRR? Should the project's accepted or rejected base on the
projected MIRR? Why?
WACC = 10%
Year:
0
1
2
3
Cash flows:
-$1,000
$350
$370
$390
390+370 ( 1.1 )+ 350 ( 1.1 )2=1,220.5
1,000=

1,220.5
( 1+ x )3

x=6.87

The projects rejected base on the projected MIRR because MIRR<WACC.

7

Davis Corporation has an investment policy that requires acceptable projects to recover all
costs within 3 years. The corporation uses the discounted payback method to assess potential
projects and uses a WACC of 10%. The cash flows for two independent projects are shown
below:
Project A
Project B
Year
Cash Flow
Cash Flow
0
-$100,000
-$80,000
1
40,000
50,000
2
40,000
20,000
3
40,000
30,000
4
30,000
0
In which investment project(s) should the company invest?
Project A :

Project B :

40,000
=36,363.64
1.1

5 0,000
=45,454.55
1.1

40,000
=33,057.85
1.12

2 0,000
=16,528.93
1.12

40,000
=30,052.59
1.13

3 0,000
=22,539.44
1.13

30,000
=20490.40
4
1.1

Project A :
100,000( 36,363.64+ 33,057.85+ 30,052.59 )=525.92
3+

525.92
=3.03 years
20490.40

Project B :

80,000 ( 45,454.55+16,528.93 )=18016.52

2+

18016.52
=2.8 years
22,539.44

Project B should the company invest.