Capital Budgeting Techniques

Questions

In a Word document, respond to the following. Number your responses 1–4.

  1. Explain the net present value (NPV) method for determining a capital budgeting project’s desirability. What is the acceptance benchmark when using NPV?
  2. Explaint the payback period statistic. What is the acceptance benchmark when using the payback period statistic?
  3. Describe the internal rate of return (IRR) as a method for deciding the desirability of a capital budgeting project. What is the acceptance benchmark when using IRR?
  4. Describe the modified internal rate of return (MIRR) as a method for deciding the desirability of a capital budgeting project. What are MIRR’s strengths and weaknesses?

Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.

Problems

In either a Word document or Excel spreadsheet, complete the following problems.

  • You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
  • If you choose to solve the problems algebraically, be sure to show your computations.
  • If you use a financial calculator, show your input values.
  • If you use an Excel spreadsheet, show your input values and formulas.

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. Based on the cash flows shown in the chart below, compute the NPV for Project Huron. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.

    Project Huron

 

Time 0 1 2 3 4
Cash Flow $12,000 $2,360 $4,390 $1,520 $3,300
      1. Based on the cash flows shown in the chart below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.

    Project Erie

 

Time 0 1 2 3 4 5
Cash Flow $12,000 $2,360 $4,390 $1,520 $980 $1,250

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