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Discounted cash flow techniques are capital budgeting techniques that take into account both the time value of money and the estimated net cash flow from an investment. These techniques take into account the fact that cash flows that occur early in the life of an investment will be worth more than those that occur later. The primary discounted cash flow technique is called net present value. Describe this method in 75 words. How is the NPV calculated and what is the decision rule?

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Keith Leannon
Keith LeannonLv2
29 Sep 2019

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A) How can NPV be used in personal life? Elaborate and explain.

B.) If you think of the term theoretically you have to come to realize that it is implied or existing only in theory and it is not practical, and speculative which is the terms used by dictionary.com. Because net present value is the theoretically correct method it is not practical for most practitioners. Net present value of cash inflows equals the initial investment and IRR is the amount of return if the firm continues to invest and receives the the given cash inflows. Net present value is just that, the net present value when you calculate NPV and then depress the IRR you get the actual internal rate of return. Net Present Value, which is figured out by taking the value of the cash inflows and take out the initial investment. The IRR equates the NPV equal to zero so that the inflows and outflows are being measured to the actual flow of money. I believe that because IRR is the practical view in which businesses “think in terms of rates of return rather than actual dollar returns. It takes into account the benefits of the investment where NPV does not” (Gitman, Zutter, 2015), and that is why the differences exist.

What are your thoughts? elaborate/explain.

Problem 1

All Techniques- Decision among mutually exclusive investments. Pound industries is attempting to select the best of three mutually exclusive projects. The initial investment and after tax cash inflows associated with these projects are shown in the following table

Cash flow Project A Project B Project C

Initial investment (CF) $80,000 $110,000 $110,000

Cash inflows (CF), T=1 to 5 $25,000 $37,000 $38,500

Calculate the payback period for each project

Calculate the net present value (NPV) of each project, assuming that the fimrm has a cost of capital equal to 11%

Calculate the internal rate of return (IRR) for each project

Indicate which project you would recommend

A-the payback period of project A is ___years

the payback period of project B is ___years

the payback period of project C is ___years

B-the NPV of project A is $____

the NPV of project B is $____

the NPV of project C is $____

C- The IRR of project A is _____

The IRR of project B is _____

The IRR of project C is _____

D- which project would you recommend?

Project A

Project B

Project C

Problem 2

IRR, investment life, and cash inflows Oak enterprise accepts projects earning more than the firms 15% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of $50,000 and requires an initial investment of $328,300

Deter the IRR of the project is it acceptable

Assuming that the cash inflos continue to be $50,000 per year how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 15%?

A. the project IRR is ___%

Is the project acceptable?

Yes or no

B. assuming that the cash inflows continue to be $50,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 15% discount rate is ____ additional years

C) with the given life, initial investment and cost of capital the minimum annual cash inflow that the firm should accept is $______

You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows: Year Projected Cash Flow 1 $94,000 2 $114,000 3 $134,000 4 $114,000 5 $94,000 Based on this information, answer the following questions: 1) How much money will be in the bank account if you leave the $300,000 alone until you need it in five years? 2) If you undertake the investment opportunity, what is the Nominal Payback Period? 3) Using the factors for 6%, what is the Discounted Payback Period? 4) What is the Net Present Value of this investment opportunity? 5) Which option – make the investment or leave the money in a savings account – would you recommend to would you recommend to your CEO? Why? What additional factors/information might make you change your point of view? Also how would you show your work using excel

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