Assignment: Capital Budgeting Decisions
Your company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years.
time
0
1
2
3
4
5
6
Cash flow
$ 10,000
2,400
4,800
3,200
3,200
2,800
2,400
Evaluate the project using each of the following methods. For each method, should the project be accepted or rejected? Justify your answer based on the method used to evaluate the projectâ€™s cash flows.
Payback period
Internal Rate of Return (IRR)
Simple Rate of Return
Net Present Value

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truonghanhduyen truonghanhduyen · Answer 1 · 2020-06-24T04:17:51+02:00

Answer:

NPV 4,648

Payback period 2.88

IRR 22.69%

Simple rate of return 31.33%

Explanation:

Payback period = 2 year + (10,000 – cash in year 1 – cash in year 2)/ cash in year 3 = 2.88 years

Net Present Value = -10000 + 2400/(1+8%) + 4800/(1+8%)^2+ 3,200/(1+8%)^3 + 3,200/(1+8%)^4 + 2,800/(1+8%)^5 + 2,400/(1+8%)^6 = 4,648

Simple Rate of Return = average cash inflow/ investment = ((2,400+4,800+3,200+3,200+2,800+2,400)/6)/10,000 = 31.33%

Internal Rate of Return (IRR): we can use excel to calculate

Please see excel attached