Capital Budgeting Techniques

Capital Budgeting Techniques

Respond to four questions and solve two computational problems about the capital budgeting process.

The capital budgeting process is a method used by organizations to evaluate their investment in various projects, such as buying new machinery or

expanding into a new plant. You will benefit from being able to demonstrate the use of the capital budgeting process, including the following techniques and terms:

• Net present value (NPV) method.
• Internal rate of return (IRR) method.
• Modified internal rate of return (MIRR) method.
• Payback period.
• Discounted payback period.
• Profitability index.

• Competency: Define finance terminology and its application within the business environment.

Identify the benchmark when using net present value (NVP).

Explain the payback period statistic.

Identify the payback period statistic acceptance benchmark.

Calculate the internal rate or return (IRR) and modified rate or return (MIRR) for a project.

Calculate the net present value (NVP) for a project.

Competency: Evaluate the financial health of an organization.

Explain the net present value (NVP) method for determining a capital budgeting project’s desirability.

Describe the internal rate of return (IRR) method for determining the desirability of a capital budgeting project.

Identify the internal rate of return (IRR) acceptance benchmark of a capital budgeting project.

Describe the modified internal rate of return (MIRR) method for determining the desirability of a capital budgeting project.

Identify the strengths and weaknesses of modified internal rate of return (MIRR).

Explain whether a project should be accepted or rejected, based on the calculated IRR and MIRR.

Instructions:

Respond to the questions and complete the problems.

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. Explain 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.

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.

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

2. 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

 

 

Capital Budgeting Techniques

Last Updated on February 10, 2019 by Essay Pro