Capital Budgeting Data

Capital Budgeting Data

1. Suppose the company is considering a potential investment project to add to its portfolio.

Calculate the following items:

1. The net present value (NPV) of the project is based on the outlay, cash flows yearly and yearly operating costs.  Yours does not agree with published result.  Your formula in the NPV cell should look like this: =NPV(F2,C14:G14)+B14, not +B140 [-6].
2. The internal rate of return (IRR) of the project is also based on the outlay, cash flows yearly and yearly operating costs.  Yours agrees with published result.
3. What are the implications of these calculations? Your summary was indicative of subject mastery and indicated that you have a grasp of the scenario, but comments should be based on accurate calculations [-6].
4. In other words, based on each of the calculations, and being mindful of the need to balance portfolio risk with return, would you recommend that the company pursue the investment?  Discussion noted and a good job of presentation, thanks.

Why or why not? Be sure to substantiate your claims. Your comments were substantive and valuable to the conclusion of the assignment.

1. What is the difference between NPV and IRR? Which one would you choose for evaluating a potential investment and why? Be sure to support your reasoning with evidence. I thought the following information is a great summary for your review and future utilization.

Key Differences Between NPV and IRR

The basic differences between NPV and IRR are presented below:

• The amassing of all present values of the cash flows of an asset, regardless of positive or negative is known as Net Present Value. On the other hand, Internal Rate of Return is the discount rate at which NPV = 0.
• The determination of NPV is calculated in absolute terms (meaning dollars), as compared to IRR’s notation determined as a percent.
• The summary of NPV’s is to find surplus cash flow from the project.  IRR denotes the state of no profit no loss because… remember, NPV is set to equal Zero.  NPV emphases investment surpluses.  IRR is concentrated the point that the project breaks even with respect to cash flow
• Results are more readily evident with NPV, however not with IRR. An example can explain this, In the case of positive NPV, the project is recommended (based on the hurdle rate set). Alternatively, if IRR = 10%, Cost of Capital < 10%, the project can be accepted, but if the Cost of Capital is equal to 16%, or any number higher than 10%, the project should be refused.
• In term project cash flows are assumed to be reinvested at cut off rate in NPV.  Alternatively, cash flows from IRR are invested at the rate of IRR.
• Timing of cash flows varies and should be considered.  IRR can be negative, or it will show multiple IRR’s.  This can make decisions more confusing. This complication is not evident in the NPV tool.
• When the amount of initial investment is high, NPV constantly shows big cash inflows.  Then again, IRR will characterize viability of the project regardless of the initial investment. This means the IRR should demonstrate healthier results when compared to NPV.
• NPV deals with dollars and IRR is percent return.  So, for budgeting purposes, NPV may be ahead to facilitate more efficient and effective decisions.
• It is important that a line or two be dedicated to the crossover point…if any.

[-6]

Source: http://keydifferences.com/difference-between-npv-and-irr.html#ixzz4ZWCeQL49

Yes, your discussion showed pertinent information and knowledge.  I always appreciate references to demonstrate actual research and not just thoughts and opinions.  I am encouraged by your efforts and look to see you “keep pulling the plow”.

Please be aware of the Turnitin Quotient.

I would be remiss if I didn’t at least ask this question.  Should we at all consider any of the following in analyzing these capital projects, such as: profitability index, Discounted profitability index, Pay back in years, Discounted payback in years, and sensitivity analyses?    Warm regards, Dr. Gary

Your formula in the NPV cell should look like this: =NPV(F2,C14:G14)+B14, not +B140

Recommendations must be based on accurate calculations