What is the time value of money and why is it important? Describe the net present value (NPV) and internal rate of return (IRR) methodologies and their use in capital budgeting decisions. What implications does an IRR analysis have on periodic positive cash flows resulting from successful project implementation?
What is the time value of money and why is it important? Describe the net present value (NPV) and internal rate of return (IRR) methodologies and their use in capital budgeting decisions. What implications does an IRR analysis have on periodic positive cash flows resulting from successful project implementation?
Related questions
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects’ expected net cash flows are as follows:
|
|
Expected Net Cash Flows |
|
|
Year |
Project A |
Project B |
|
0 |
($50,000) |
($50,000) |
|
1 |
25,000 |
15,000 |
|
2 |
20,000 |
15,000 |
|
3 |
10,000 |
15,000 |
|
4 |
5,000 |
15,000 |
|
5 |
5,000 |
15,000 |
- Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
Net Present Value Versus Internal Rate of Return
For discount factors use Exhibit 14B-1 and Exhibit 14B-2.
Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow:
| Year | Project I | Project II | ||
| 0 | $(100,000) | $(100,000) | ||
| 1 | â | 63,857 | ||
| 2 | 134,560 | 63,857 |
Skiba's cost of capital is 16%.
Required:
1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent.
| NPV | IRR | |
| Project I | $ | % |
| Project II | $ | % |
2. Conceptual Connection: Why the project with the larger NPV is the correct choice for Skiba.
