Table of Contents

Part 1..........................................................................................................................................................2
No 1 Answer:...........................................................................................................................................2
No 2 Answer:...........................................................................................................................................2
Net present value (NPV):..................................................................................................................3
Internal rate of return (IRR):...........................................................................................................3
Payback Period (PP):........................................................................................................................4
Modified internal rate of return (MIRR).........................................................................................5
No 3 Answer:...........................................................................................................................................6
No 4 Answer:...........................................................................................................................................7
Part 2..........................................................................................................................................................8
No 1 Answer:...........................................................................................................................................8
No 2 Answer:...........................................................................................................................................8
Calculation of Net present value (NPV):..........................................................................................8
Calculation of Internal rate of return (IRR):................................................................................10
Calculation of Payback Period (PP):..............................................................................................10
Calculation of Modified Internal rate of return (MIRR):............................................................11
References..............................................................................................................................................13

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Part 1
No 1 Answer:
By looking at the project’s cashflow simply, the user can rank the project by using their excess
cashflows over the investment.

Rank Project No Excess cashflow over the

investment
1 3 $7,000,000
2 2 $5,165,000
3 6 $4,200,000
4 7 $2,500,000
5 5 $2,200,000
6 8 $2,150,000
7 4 $1,562,000
8 1 $1,310,000

With the help of simple inspections, the projects could be ranked easily. However, as a new
capital budgeting analyst for a company, it is important to use formalized investment appraisal
methods in order to rank the projects.

No 2 Answer:
As a new capital budgeting analyst for a company considering investments in the eight projects
listed in Exhibit 1, I would like use formalized investment appraisal methods in order to rank the
projects. Therefore, following methods I will use to analyze the cashflows of different projects,

i. Net present value (NPV)

ii. Internal rate or return (IRR)
iii. Payback period (PP)
iv. Modified Internal rate of return (MIRR)

All the methods need to be used and justify in order to get best methods to use to rank the
project. Therefore, all the methods would be used on the cashflows of exhibit 1 and rank the
project in order to justify all the methods.

2
Net present value (NPV):
 The net present value (NPV) applies to a series of cash flows occurring at different times. The
present value of a cash flow depends on the interval of time between now and the cash flow. It
also depends on the discount rate. NPV accounts for the time value of money. It provides a
method for evaluating and comparing capital projects or financial products with cash flows
spread over time, as in loans, investments, payouts from insurance contracts plus many other
applications.

NPV outcomes for eight projects are as follows:

Projects NPV outcomes $000 Ranks

Project 1 73.09 8

Project 2 1824.26 4

Project 3 7000.00 1

Project 4 228.22 6

Project 5 129.70 7

Project 6 2257.90 2

Project 7 1013.24 5

Project 8 2150.00 3

Internal rate of return (IRR):

Capital budgeting is a function of management, which uses various techniques to assist in
decision making. Internal Rate of Return (IRR) is one such technique of capital budgeting. It is
the rate of return at which the net present value of a project becomes zero. They call it ‘internal’
because it does not take any external factor (like inflation) into consideration.

IRR outcomes for eight projects are as follows:

Projects IRR Rank

Project 1 10.87% 6

Project 2 28.16% 2

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 Project 3 10.55% 7

Project 4 12.33% 4

Project 5 11.12% 8

Project 6 43.21% 1

Project 7 25.43% 3

Project 8 11.41% 5

Payback Period (PP):

Payback period is widely used when long-term cash flows are difficult to forecast, because no
information is required beyond the break-even point. It may be used for preliminary evaluation
or as a project screening device for high risk projects in times of uncertainty. Payback period is
usually measured as the time from the start of production to recovery of the capital investment.

Payback period outcomes for eight projects are as follows:

Project Payback Period Rank

Project 1 7 5

Project 2 2 2

Project 3 15 8

Project 4 6 4

Project 5 8 7

Project 6 1 1

Project 7 2 2

Project 8 7 5

4
Modified internal rate of return (MIRR)
Modified internal rate of return (MIRR) is a similar technique to IRR. Technically, MIRR is the
IRR for a project with an identical level of investment and NPV to that being considered but with
a single terminal payment. 

MIRR outcomes for eight projects are as follows:

Projects MIRR Rank

Project 1 10.49% 7

Project 2 17.42% 2

Project 3 10.55% 6

Project 4 10.65% 5

Project 5 10.46% 8

Project 6 24.76% 1

Project 7 15.13% 3

Project 8 11.18% 4

All above four methods shows different results in order to rank the projects. However, there are
few projects which frequently comes on the top four. Those projects are project 2, 6, 7 and 8.
Although, it could be said that, as 7 and 8 are mutually exclusive, therefore, only one could be
considered.

In order to determine the appropriate methods among those four, it could be said that, NPV
provides best outcomes in order to evaluate the projects.

There are many reasons to consider NPV over other methods. Some of the reasons are as
follows,

Time Value of Money

The primary advantage of using NPV is that it considers the concept of the time value of
money i.e a dollar today is worth more than a dollar tomorrow owing to its earning capacity. The

5
computation under NPV takes into account the discounted net cash flows of an investment in
order to determine its viability. 

Decision-Making

NPV method enables the decision-making process for companies. Not only does it help evaluate
projects of the same size, but it also helps in identifying whether a particular investment is profit-
making or loss-making.

No 3 Answer:
By using quantitative methods, there are several ranking has taken place. However, as it has
already been shown that, NPV method is the best in order to rank the project, therefore, in here,
NPV outcomes plays an important role in order to compare the outcomes of simple investigation
outcomes and quantitative investigation outcomes.

Following table will show the difference between two outcomes,

Projects NPV Ranks by Excess cashflow Rank by using

outcomes using NPV over the investment simple
$000 outcomes $000 investigation

Project 1 73.09 8 1310 8

Project 2 1824.26 4 5165 3

Project 3 7000.00 1 7000 1

Project 4 228.22 6 1562 7

Project 5 129.70 7 2200 5

Project 6 2257.90 2 4200 3

Project 7 1013.24 5 2500 4

Project 8 2150.00 3 2150 6

6
No 4 Answer:
The cashflows that has shown in Exhibit 1 has got similar type of cashflows in the real-life
businesses. The type of real-life investment projects are as follows,

No Project Real investment projects

1 Project 1 Bonds investment
2 Project 2 Equipment depreciation
3 Project 3 Land or real estate investment
4 Project 4 Dairy factory that incur agricultural costs
5 Project 5 Car loan
6 Project 6 Stock
7 Project 7 Delivery vehicle depreciation
8 Project 8 Construction Project

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Part 2
No 1 Answer:
The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which
each category of capital is proportionately weighted. All sources of capital, including common
stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

Calculation of WACC by using the information is as follows,

Total firm value = $2,000,000 + $500,000 + $2,500,000

= $5,000,000

Therefore,

Formula for WACC is as follows,

WACC= cost of equity * % Equity + Cost of Debt * %Debt * (1-Tax rate) + Cost of Preferred
stock * % Preferred stock

2000000 500000 2500000

WACC= {
5000000
∗¿.36)*0.1} + (
5000000
∗0.14 +(
5000000 )
∗0.16)

= 0.0256 + 0.014 + 0.08

=0.1196

= 11.96%

No 2 Answer:
Calculation of Net present value (NPV):
  Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8
$ $ $ $
Initial 2,000.0 2,000.0 2,000.0 $ $ 2,000.0 $ 2,000.0
Investment 0 0 0 2,000.00 2,000.00 0 2,000.00 0
Year                
$ $ $ $ $ $ $
1 300.00 1514.55   145.45 254.55 1818.00 1090.91 (318.18)
2 $ $   $ $   $ $

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 272.73 276.03 165.29 231.40 743.80 (49.59)
$ $ $ $ $ $
3 247.93 123.97   262.96 210.37   225.39 45.08
$ $ $ $ $
4 225.39     269.79 191.24   61.47 239.05
$ $ $ $ $
5 204.90     268.84 173.86   43.46 434.64
$ $ $ $ $
6 186.28     248.37 158.05 2258.00   677.37
$ $ $ $
7 169.34     226.82 143.68     1154.61
$ $ $
8 466.51     207.13 130.62      
$ $ $
9       189.15 118.75   848.20  
$ $ $
10   1927.50   172.72 107.95      
$ $
11       157.72 98.14      
$ $
12       143.70 89.22      
$ $
13       130.64 81.11      
$ $
14       119.03 73.73      
$ $ $
15     2393.92 (478.8) 67.03      
$ $ $ $ $ $ $ $
Total DCF 2073.08 3842.5 2154.53 228.22 129.70 4076.00 2942.23 2182.98
Excess of
cashflow
Over $ $ $ $ $ $ $ $
investment 73.08 1842.5 154.53 228.22 129.70 2076.00 942.23 182.98
Rank 8 2 6 4 7 1 3 5

9
Calculation of Internal rate of return (IRR):

Projects IRR Rank

Project 1 10.87% 6

Project 2 28.16% 2

Project 3 10.55% 7

Project 4 12.33% 4

Project 5 11.12% 8

Project 6 43.21% 1

Project 7 25.43% 3

Project 8 11.41% 5

Calculation of Payback Period (PP):

Project Payback Period Rank

Project 1 7 5

Project 2 2 2

Project 3 15 8

Project 4 6 4

Project 5 8 7

Project 6 1 1

Project 7 2 2

Project 8 7 5

Calculation of Modified Internal rate of return (MIRR):

10
 Projects MIRR Rank

Project 1 10.49% 7

Project 2 17.42% 2

Project 3 10.55% 6

Project 4 10.65% 5

Project 5 10.46% 8

Project 6 24.76% 1

Project 7 15.13% 3

Project 8 11.18% 4

In order to determine the appropriate methods among those four, it could be said that, NPV
provides best outcomes in order to evaluate the projects.

There are many reasons to consider NPV over other methods. Some of the reasons are as
follows,

Time Value of Money

The primary advantage of using NPV is that it considers the concept of the time value of
money i.e a dollar today is worth more than a dollar tomorrow owing to its earning capacity. The
computation under NPV takes into account the discounted net cash flows of an investment in
order to determine its viability. 

Decision-Making

NPV method enables the decision-making process for companies. Not only does it help evaluate
projects of the same size, but it also helps in identifying whether a particular investment is profit-
making or loss-making.

11
References
Gullifar, L. & Payne, J., 2015. Corporate Finance Law: Principles and Policy. Oxford:
Oxford university press.

Hillier, D., 2016. Corporate Finance: European Edition (UK Higher Education Business
Finance). Berkshire: Mcgrewhill.

Terence, T., 2018. Corporate Finance: The Basics. Oxon: Apex.

Warner, S. & Hussain, S., 2017. The Finance Book: Understand the numbers even if
you're not a finance professional. London: FT Publishing.

Watson, D. & Head, A., 2013. Corporate Finance: Principles and Practice. Harlow:
Pearson.

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