Project #12341 - Finance

Assignment:

Need to show work.

Capital Budgeting Practice Problems

a. Consider the project with the following expected cash flows:

     Year	             Cash flow
       0	           -$400,000
       1                    $100,000
       2                    $120,000
       3                    $850,000
  • If the discount rate is 0%, what is the project's net present value?
  • If the discount rate is 2%, what is the project's net present value?
  • If the discount rate is 6%, what is the project's net present value?
  • If the discount rate is 11%, what is the project's net present value?
  • With a cost of capital of 5%, what is this project's modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[ Look at the graph you draw and write a short paragraph stating what the graph 'shows"]..

b. Consider a project with the expected cash flows:

    Year                    Cash flow
       0             -$815,000
       1                    $141,000
       2                    $320,000
       3                    $440,000
  • What is this project's internal rate of return?
  • If the discount rate is 1%, what is this project's net present value?
  • If the discount rate is 4%, what is this project's net present value?

  • If the discount rate is 10%, what is this project's net present value?

  • If the discount rate is 18%, what is this project's net present value?

    Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

    [ Observe the graph and write a short paragraph stating what the graph 'shows]

c. A project requiring a $4.2 million investment has a profitability index of 0.94. What is its net present value?  (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment)

 

 

Subject Business
Due By (Pacific Time) 09/15/13
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