Activiti 1 Capital Budgeting 1

Name: Laura Leticia López Aguilar ID: 176252

In the following activity, you will have to answer multiple questions as well as open questions. Also, you have to show your workout for all the
questions that need calculations.

1. A company is considering a project that would require an initial investment of $270 million. The project will help increase the firm’s after-tax
net cash flows by $30 million per year in perpetuity, and it is found to have a negative NPV of $20 million. Calculate the IRR of the project.
Calculation: Rate check

Data Cash flows tasa NPV

cfo-to -$270,000,000.00 5% $106,991,803.09
t1 $30,000,000.00 7% $82,405,868.16
t2 $60,000,000.00 9% $60,020,981.85
t3 $90,000,000.00 11% $39,597,013.44
t4 $120,000,000.00 13% $20,924,225.90
t5 $150,000,000.00 15% $3,818,937.24
NPV -$20,000,000.00 16% -$4,197,082.28
IRR 15% 17% -$11,880,132.58
18% -$19,247,379.41
19% -$26,314,947.75
Formula excel: IRR=(cfo:t5)
Formula excel: NPV=(tasa%,t1:t5)+cfo

answer problem 1: IRR= 15%

2. A project presents the following annual cash flows:

Year 0 Year 1 Year 2 Year 3

−$606,061 $2,151,515 −$2,542,424 $1,000,000

Data Cash flows

Year0 -$ 606,061.00 tasa NPV
y1 $ 2,151,515.00 15% -$99.97
y2 -$ 2,542,424.00 18% -$41.66
y3 $ 1,000,000.00 21% $14.70

NPV 21%

Formula excel: NPV=(tasa%,t1:t3)+Year0

Which discount rate most likely provides a positive net present value (NPV)?
A. 15%
B. 21% answer problem 2 letter B: 21%
C. 18%

3. A company has a fixed $1,100 capital budget and has the opportunity to invest in the four independent projects listed in the table:
Suma Inv. Outlay Suma NPV
Project Investment Outlay NPV A (1 y 2) $1,100 200
1 $600 $100 B (2,3 y 4) $1,000 200
2 $500 $100 C (1,3 y 4) $1,100 200
3 $300 $50
4 $200 $50

The combination of projects that provides the best choice is:

A. 1 y 2.
B.2, 3 y 4. answer problem 3: letter B (2,3 y 4)
C. 1, 3 y 4.

note: The investment required for projects does not exceed the fixed capital budget of $1,100 for the above, it is advisable to invest
in option B

4. Two mutually exclusive projects have the following cash flows (€) and internal rates of return (IRR):

Project IRR Year 0 Year 1 Year 2 Year 3 Year 4

A 27.97% -€ 2,450.00 € 345.00 € 849.00 € 635.00 € 3,645.00
B 28.37% -€ 2,450.00 € 345.00 € 849.00 € 1,051.00 € 3,175.00

Project A
Year0 -€ 2,450.00 tasa NPV IRR
y1 € 345.00 8% 1780.59 27.97%
y2 € 849.00
y3 € 635.00 formula NPV=(tasa%,y1:y4)+Year0
y4 € 3,645.00

Project B
Year0 -€ 2,450.00 tasa NPV IRR
y1 € 345.00 8% 1765.36 28.37%
y2 € 849.00
y3 € 1,051.00 formula NPV=(tasa%,y1:y4)+Year0
y4 € 3,175.00

Assuming a discount rate of 8% annually for both projects, the best decision for the firm to make is to accept:
A. Only project B
B. Only project A answer problem 4: Proyect A
C. Both projects

Note: Project A, is the one that generates a greater profit of 1780.59 with an IRR of 27.97%, therefore, it would be the more profitable
of the two projects,

5. When computing the cash flows for a capital project, which of the following is least likely to be included?

A. Financing costs answer problem 5: Option A.

B. Opportunity costs
C. Tax effects

Note: These costs are usually not contemplated as the required rate of return takes into account financial costs (cost of debt and
cost of capital)