Capital budgeting

  1. Define capital budgeting and list and briefly describe the 5 steps in the capital budgeting process.
  2. Define and describe a project’s Net Present Value.
  3. Describe how Net Present Value is used to choose among projects in the capital budgeting process.
    You must cite at least 1 external source in IWG format.

Sample Solution

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Capital Budgeting

Capital Budgeting.

Answer problems on excel that i have downloaded using the information below

Calculate the NPV for each project and determine which project should be accepted.

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Project A
Project B
Project C
Project D

Inital Outlay
(105,000.000)
(99,000.00)
(110,000.00)
(85,000.00)

Inflow year 1
53,000.00
51,000.00
25,000.00
45,000.00

Inflow year 2
50,000.00
47,000.00
55,000.00
50,000.00

Inflow year 3
48,000.00
41,000.00
15,000.00
30,000.00

Inflow year 4
30,000.00
52,000.00
21,000.00
62,000.00

Inflow year 5
35,000.00
40,000.00
35,000.00
68,000.00

Rate
7%
10%
13%
18%

Your company is considering three independent projects. Given the following cash flow information, calculate the payback period for each. If your company requires a three-year payback before an investment can be accepted, which project(s) would be accepted?

Project D
Project E
Project F

Cost
205,000.00
179,000.00
110,000.00

Inflow year 1
53,000.00
51,000.00
25,000.00

Inflow year 2
50,000.00
87,000.00
55,000.00

Inflow year 3
48,000.00
41,000.00
21,000.00

Inflow year 4
30,000.00
52,000.00
9,000.00

Inflow year 5
24,000.00
40,000.00
35,000.00

Using market value and book value (separately), find the adjusted WACC, using 30% tax rate.

Component
Balance Sheet Value
Market Value
Cost of Capital

Debt
5,000,000.00
6,850,000.00
8%

Preferred Stock
4,000,000.00
2,200,00.00
10%

Common Stock
2,000,000.00
5,600,000.00
13%

 
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Capital Budgeting

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