MKM704 - Finance for Marketers - Lab 4 Solution

Year 0 1 2 3 4 5 6 7 8
($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's)

Opportunity #1
Initial Investment $2,000
Cash Flows -$2,000 $400 $600 $600 $800 $600 $300 $0 $0
Cumulative Cash Flow -$2,000 -$1,600 -$1,000 -$400 $400 $1,000 $1,300 $1,300 $1,300
Fraction Calculation n/a n/a n/a 0.5 0.7 3.3 #DIV/0! #DIV/0!
Net Present Value $200
Internal Rate of Return 16.48%
Payback Period 3.5

Opportunity #2
Initial Investment $1,000
Cash Flows -$1,000 $600 $450 $250
Cumulative Cash Flow -$1,000 -$400 $50 $300 $300 $300 $300 $300 $300
Fraction Calculation n/a 0.9 0.2 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Net Present Value $57
Internal Rate of Return 16.83%
Payback Period 1.9

Opportunity #3
Initial Investment $2,500
Cash Flows -$2,500 $200 $400 $700 $1,100 $1,800 $2,100 $2,100 $2,100
Cumulative Cash Flow -$2,500 -$2,300 -$1,900 -$1,200 -$100 $1,700 $3,800 $5,900 $8,000
Fraction Calculation n/a n/a n/a n/a 0.1 0.8 1.8 2.8
Net Present Value $2,818
Internal Rate of Return 31.13%
Payback Period 4.1

Opportunity #4
Initial Investment $1,250
Cash Flows -$1,250 $300 $450 $450 $200 $100
Cumulative Cash Flow -$1,250 -$950 -$500 -$50 $150 $250 $250 $250 $250
Fraction Calculation n/a n/a n/a 0.3 1.5 #DIV/0! #DIV/0! #DIV/0!
Net Present Value -$143

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 MKM704 - Finance for Marketers - Lab 4 Solution
Year 0 1 2 3 4 5 6 7 8
($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's) ($'000's)

Internal Rate of Return 7.50%

Payback Period 3.3

Opportunity #5
Initial Investment $750
Cash Flows -$750 $700 $400
Cumulative Cash Flow -$750 -$50 $350 $350 $350 $350 $350 $350 $350
Fraction Calculation n/a 0.1 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Net Present Value $183
Internal Rate of Return 33.33%
Payback Period 1.1

Opportunity #6
Initial Investment $1,000
Cash Flows -$1,000 $100 $400 $200 $700 $400 $400
Cumulative Cash Flow -$1,000 -$900 -$500 -$300 $400 $800 $1,200 $1,200 $1,200
Fraction Calculation n/a n/a n/a 0.4 1.0 2.0 #DIV/0! #DIV/0!
Net Present Value $379
Internal Rate of Return 23.58%
Payback Period 3.4

Total
Initial Investment $8,500
Cash Flows -$8,500 $2,300 $2,700 $2,200 $2,800 $2,900 $2,800 $2,100 $2,100
Cumulative Cash Flow -$8,500 -$6,200 -$3,500 -$1,300 $1,500 $4,400 $7,200 $9,300 $11,400
Fraction Calculation n/a n/a n/a 0.5 0.5 1.6 3.4 4.4
Net Present Value $3,493
Internal Rate of Return 24.21%
Payback Period 3.5

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 MKM704 - Finance for Marketers - Lab 4 Solution
Year 0 1 2 3 4 5 6 7 8

Opportunity #1
Initial Investment -$ 1,850.00
Cash Flows $ 500.00 $ 650.00 $ 700.00 $ 800.00 $ 600.00 $ 300.00 $ - $ -
Cumulative Cash Flow -$ 1,850.00 -$ 1,350.00 -$ 700.00 $ - $ 800.00 $ 1,400.00 $ 1,700.00 $ 1,700.00 $ 1,700.00
Net Present Value (10% Discount Rate) $ 755.96 10%
Net Present Value (15% Discount Rate) $ 421.94 15%
Net Present Value (20% Discount Rate) $ 150.55 20%
Internal Rate of Return 23.27%
Payback Period 3.00

Opportunity #2
Initial Investment -$ 1,000.00
Cash Flows $ 600.00 $ 450.00 $ 250.00
Cumulative Cash Flow -$ 1,000.00 -$ 400.00 $ 50.00 $ 300.00
Net Present Value (10% Discount Rate) $105.18 10%
Net Present Value (15% Discount Rate) $26.38 15%
Net Present Value (20% Discount Rate) -$42.82 20%
Internal Rate of Return 16.83%
Payback Period 1.89

Opportunity #3
Initial Investment -$ 2,500.00
Cash Flows $ 200.00 $ 400.00 $ 700.00 $ 1,000.00 $ 1,600.00 $ 2,100.00 $ 2,100.00 $ 2,250.00
Cumulative Cash Flow -$ 2,500.00 -$ 2,300.00 -$ 1,900.00 -$ 1,200.00 -$ 200.00 $ 1,400.00 $ 3,500.00 $ 5,600.00 $ 7,850.00
Net Present Value (10% Discount Rate) $3,527.47 10%
Net Present Value (15% Discount Rate) $2,236.75 15%
Net Present Value (20% Discount Rate) $1,287.43 20%
Internal Rate of Return 30.38%
Payback Period 6.75

Opportunity #4
Initial Investment -$ 1,250.00
Cash Flows $ 450.00 $ 450.00 $ 450.00 $ 200.00 $ 100.00
Cumulative Cash Flow -$ 1,250.00 -$ 800.00 -$ 350.00 $ 100.00 $ 300.00 $ 400.00
Net Present Value (10% Discount Rate) $67.78 10%
Net Present Value (15% Discount Rate) -$58.48 15%
Net Present Value (20% Discount Rate) -$165.44 20%
Internal Rate of Return 12.58%
Payback Period 2.78

Opportunity #5
Initial Investment -$ 750.00
Cash Flows $ 700.00 $ 450.00
Cumulative Cash Flow -$ 750.00 -$ 50.00 $ 400.00
Net Present Value (10% Discount Rate) $258.26 10%
Net Present Value (15% Discount Rate) $198.96 15%
Net Present Value (20% Discount Rate) $145.83 20%
Internal Rate of Return 37.10%
Payback Period 1.11

Opportunity #6
Initial Investment -$ 1,000.00
Cash Flows $ 125.00 $ 400.00 $ 200.00 $ 700.00 $ 400.00 $ 400.00
Cumulative Cash Flow -$ 1,000.00 -$ 875.00 -$ 475.00 -$ 275.00 $ 425.00 $ 825.00 $ 1,225.00
Net Present Value (10% Discount Rate) $ 546.75 10%
Net Present Value (15% Discount Rate) $ 314.69 15%
Net Present Value (20% Discount Rate) $ 129.97 20%
Internal Rate of Return 24.30%
Payback Period 3.19

Opportunity #7
Initial Investment -$ 850.00
Cash Flows $ 350.00 $ 300.00 $ 300.00 $ 250.00 $ 250.00 $ 200.00 $ 200.00 $ 150.00
Cumulative Cash Flow -$ 850.00 -$ 500.00 -$ 200.00 $ 100.00 $ 350.00 $ 600.00 $ 800.00 $ 1,000.00 $ 1,150.00
Net Present Value (10% Discount Rate) $1,284.54 10%
Net Present Value (15% Discount Rate) $708.08 15%
Net Present Value (20% Discount Rate) $371.33 20%
Internal Rate of Return 29%
Payback Period 2.67

Short Answer:

If your firm has a total available capital

budget of $4,500, which of these project
net presentwould
value.would
Basedchoose
on this to
I would pickand
execute project 3 because it forecasts high NPV potential. However I also like the payback period presented in opportunity 7, with the given investment and the potential it shows. 0ppo
why?

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