Project #62441 - Fundamentals of Finance Unit 5 (One Assignment)

***Homework is due EARLY this week- because the course ends on Friday! (Hallelujah!) I've still provided 4 days though. Thanks!

 

Unit 5 Assignment #1- Fundamentals of Finance

Capital Budgeting Measurement Criteria

Introduction

In this assignment, you will learn about the capital budgeting process, which is basically how companies evaluate their investment in various projects, such as buying new machinery or expanding into a new plant. In addition, you will learn about the following techniques used in capital budgeting:

·         Net Present Value.

·         Internal Rate of Return.

·         Modified Internal Rate of Return.

·         Payback Period.

·         Discounted Payback Period.

·         Profitability Index.

Instructions

Answer the following questions and complete the following problems, as applicable. Please answer all Distinguished level questions. 

You may solve the following problems algebraically, on MS Word. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. 

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

1.    Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV?

Distinguished: and identifies the NPV method's strengths and weaknesses.

 

2.    What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic?

Distinguished: and identifies what problem of the Payback Period method is correct by using the Discounted Payback Period method.

 

3.    Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR?

Distinguished: and explains how the NPV and IRR methods are similar, and how they are different.

 

4.    Describe the Modified Internal Rate of Return (MIRR) method for determining a capital budgeting project's desirability. What are MIRR's strengths and weaknesses?

Distinguished: and explains the differences in the reinvestment rate assumption that distinguishes MIRR from IRR

5.    Compute the NPV statistic for Project Y and tell [advise] whether the firm should accept or reject the project with the cash flows shown in the chart if the appropriate cost of capital is 12 percent.

Distinguished: and explains how decreases in the cost of capital lead to an increase in the number of approved projects.

Project Y

 

Time

0

1

2

3

4

Cash Flow

-$11,000

$3,350

$4,180

$1,520

$2,000

(Cornett, Adair, & Nofsinger, 2014).

6.    Compute the payback period statistic for Project B and decide whether the firm should accept or reject the project with the cash flows shown in the chart if the maximum allowable payback is three years.

Distinguished: and explains why, if the discounted payback period were computed, it would be less than, equal to, or greater than the non-discounted payback period.

Project B

 

Time

0

1

2

3

4

5

Cash Flow

-$11,000

$3,350

$4,180

$1,520

$950

$1,000

(Cornett, Adair, & Nofsinger, 2014).

 

 

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill.

 

 

Subject Mathematics
Due By (Pacific Time) 03/19/2015 10:00 am
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