Capital budgeting techniques

Solidify your understanding on the capital budgeting
techniques (mainly Net Present Value and Internal Rate of Return). The scores of this assignment
will help in assessing the following learning goal of the course: “students successfully completing
this course will be able to apply capital budgeting techniques to evaluate long term investment
decisions of firm.
Instructions:
You are required to use a financial calculator or spreadsheet (Excel) to solve the following
capital budgeting problem (sample questions and solutions are provided for guidance):
Windrunner Corp. is considering a new machine that requires an initial investment of
$1,200,000 installed and has a useful life of 10 years. The expected annual after-tax cash
flows for the machine are $150,000 during the first 4 years, $200,000 during years 5 through
8 and $250,000 during the last two years.
(i) Develop the timeline (linear representation of the timing of cash flows)
(ii) Calculate the Payback Period (PB).
(iii) Calculate the Internal Rate of Return (IRR).
(iv) Calculate the Net Present Value (NPV) at the following required rates of return:
(a) 6% (b) 8% (c) 10% (d) 12%
(v) Calculate the Profitability Index (PI) at the following required rates of return:
(a) 6% (b) 8% (c) 10% (d) 12%
(vi) Using IRR and NPV criterion, comment if the project should be accepted or rejected at
the following required rates of return:
(a) 6% (b) 8% (c) 10% (d) 12%
(vii) Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis).
2
Grading Rubric
Learning
Objective
Subcomponent Not
Submitted
0
Does Not
Meet
Expectations
1
Meets
expectations
2
Exceeds Expectations
3
The student will Completes Completes Relevant information is
convert relevant conversion of conversion of expressed in an
information into No information information insightful mathematical
various attempt but resulting into portrayal in a way that
mathematical made mathematical mathematical contributes to a further
forms (e.g., portrayal is portrayal or deeper
equations, inappropriate understanding (e.g.,
graphs, diagrams, or inaccurate correctly develops
tables, words) timeline of cash flows
by labeling initial
investments, future
cash flows and required
rate of return)
LO#3: The The student will Calculations Calculations Calculations attempted