Capital Budgeting Project

In this exercise, you are a new capital-budgeting analyst for a company considering investments in t
eight projects listed below. The chief financial officer (CFO) of your company has asked you to rank th
projects and recommend the "four best" that the company should accept.
Only quantitative considerations are relevant. No other project characteristics are deciding factors i
selection, except that management has determined that projects 7 and 8 are mutually- exclusive.
In groups of 1 to 3 members, you must analyze six independent projects and two mutually-exclusive
projects with the cash flows listed below.
Each Project is analyzed on its own worksheet, see the labeling of the worksheets below. The only
projects that are analyzed together are Projects 7 and 8.

Please analyze the cash flows by calculating the following:

1. Payback Period - 1 point per project
2. Discounted Payback Period at 5%, 10%, and 15% - 3 points per project
3. Internal Rate of Return (IRR) - 3 points per project
4. NPV at 5%, 10%, 15%. - 9 points per project
5. Calculate the Profitability Index - PI at 5%, 10%, and 15%. - 9 points per project
6. Modified Internal Rate of Return (MIRR) at 5%, 10%, and 15% - 9 points per project

For Projects 7 and 8, calculate the above PLUS do the analysis below to help determine which one is t
best project.

6. Calculate and Graph the NPV Profiles for Projects 7 and 8. - 4 points
7. Calculate the crossover rate for Projects 7 and 8. - 4 points
8. Which is better of the two projects, 7 or 8, and would 7 or 8 be ranked among the top four?
9. On the "Rankings and Explanations" worksheet, provide your top four projects and the capital budge
results you used to substantiate this. - 15 points
7. Calculate the crossover rate for Projects 7 and 8. - 4 points
8. Which is better of the two projects, 7 or 8, and would 7 or 8 be ranked among the top four?
9. On the "Rankings and Explanations" worksheet, provide your top four projects and the capital budge
results you used to substantiate this. - 15 points

Project Number 1 2 3 4
Initial Investment $ (3,000) $ (3,000) $ (3,000) $ (3,000)
Year 1 $ 495 $ 2,499 $ 240
2 495 461 300
3 495 245 525
4 495 590
5 495 648
6 495 660
7 495 661
8 $ 1,500 666
9 624
10 672
11 675
12 676
13 676
 14 678
15 $ 15,000 $ (3,000)
Sum of cash flow
benefits $ 4,965 $ 3,205 $ 15,000 $ 5,291
Excess of cash flow
over initial
investment $ 1,965 $ 205 $ 12,000 $ 2,291

Refer to Investopedia at the following links:

https://www.investopedia.com/terms/i/irr.asp
https://www.investopedia.com/terms/n/npv.asp
https://www.investopedia.com/terms/p/profitability.asp
https://www.investopedia.com/terms/p/paybackperiod.asp
https://www.investopedia.com/terms/d/discounted-payback-period.asp
https://www.investopedia.com/terms/m/mirr.asp
considering investments in the
y has asked you to rank the

istics are deciding factors in the

re mutually- exclusive.
and two mutually-exclusive

orksheets below. The only two

project
per project

lp determine which one is the

mong the top four?

ojects and the capital budgeting
mong the top four?
ojects and the capital budgeting

5 6 7 8
$ (3,000) $ (3,000) $ (3,000) $ (3,000)
$ 420 $ 3,300 $ 1,800 $ (525)
$ 420 1350 $ (90)
$ 420 450 90
$ 420 135 525
$ 420 105 1050
$ 420 $1,800
$ 420 $3,375
$ 420
$ 420
$ 420
$ 420
$ 420
$ 420
$ 420
$ 420

$ 6,300 $ 3,300 $ 3,840 $ 6,225

$ 3,300 $ 300 $ 840 $ 3,225

Example Problem for Capital Budgeting Project
You have two mutually-exclusive projects - A and B - with the cash flows listed below.
Please analyze the cash flows by calculating the following:
1. For each project, calculate the payback period and discounted payback period.
2. Calculate the NPV at both cost of capital rates provided.
3. Calculate the IRR.
4. Calculate the MIRR at both cost of capital rates provided.
5. Calculate the Profitability Index - PI - for each project at each cost of capital provided.

For mutually-exclusive projects only:

6. Calculate and Graph the NPV Profiles for both A and B.
7. Calculate the crossover rate.

Y1 Y2 Y3 Y4 Y5
Payback Period A -950 -1170 -1321 -121 0.15
B -430 -210 0.955 2.95
Discounted Payback A -878 -1045 -1144 -458 -50
B -459 -292 -148 -22 0.20
5yrs A 4.41B 3.28

Two Mutually-Exclusive projects Expected Cash

Cost of Capital = I/Y = ? 5% Year Project A
10% 0 -400
15% 1 -550
2 -220
3 -151
4 1200
5 821
6 993
7 -324
NPV5 $ 887.45
NPV10 $528.39
NPV15 $257.89
IRR 22%
MIRR5 12%
MIRR10 15%
MIRR15 18%
PI5 3.22
PI10 2.32
PI15 1.64
NPV Profile
Rate NPV(A)
1% $1,260.80
2% $1,158.95
3% $1,063.03
4% $972.65
5% $887.45
6% $807.11
7% $731.31
8% $659.76
 9% $592.20
10% $528.39
11% $468.08
12% $411.07
13% $357.16
14% $306.15
15% $257.89
16% $212.19
17% $168.92
NPV Profiles of A and B
1400
18% $127.93
1200
1000
19% $89.10
800 20% $52.28
600
400 21% $17.38
200
0
22% -$15.73
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35
-200
-400
23% -$47.13
NPV(A) NPV(B) 24% -$76.92
25% -$105.21
26% -$132.05
27% -$157.55
28% -$181.76
29% -$204.76
30% -$226.62
ted below.

ided.

Y6 Y7
4.15
 0.12 4.41 4.74 5.12
3.28 3.68 4.20

Expected Cash Flows

Discounted Project B Discounted Project A - Project B
-650 250
-478 220 191 -770
-166 220 166 -440
-99 220 145 -371
686 220 126 980
408 220 109 601
429 220 95 773
-122 220 83 -544
$ 623.00
$421.05
$265.29
 28% 14.62%
16% Crossover rate
18%
21%
1.96
1.65
1.41

NPV(B)
$830.20
$773.84
$720.66
$670.45
$623.00
$578.12
$535.64
$495.40
$457.25
$421.05
$386.68
$354.03
$322.97
$293.43
$265.29
$238.48
$212.92
$188.54
$165.25
$143.01
$121.75
$101.41
$81.95
$63.31
$45.45
 $28.33
$11.91
-$3.86
-$18.99
-$33.54
Project Number 1 Discounted Cash Flows 5%
Initial Investment 0 -3000
Year 1 495 471.43
2 495 448.98
3 495 427.60
4 495 407.24
5 495 387.85
6 495 369.38
7 495 351.79
8 1500 1015.26
9
10 Payback Period
11 -2505 Yr 1
12 -2010 Yr 2
13 -1515 Yr 3
14 -1020 Yr 4
15 -525 Yr 5
Sum of cash flow benefits 4965 -30 Yr 6
Excess of cash flow over initia 1965 0.02
6.02 Years
Rate 5% Discounted Payback 5%
Rate 10% -2528.57 Yr 1
Rate 15% -2079.59 Yr 2
-1651.99 Yr 3
IRR 10.87% -1244.75 Yr 4
-856.91 Yr 5
NPV 5% $ 879.51 -487.53 Yr 6
-135.75 Yr 7
NPV 10% $ 109.63 0.13
7.13 Years
NPV 15% -450.24

PI 5% 1.29

PI 10% 1.04

PI 15% 0.85
MIRR 5% 8% More than 5%

MIRR 10% 7% Less than 10%

MIRR 15% 13% Less than 15%

Discounted Cash Flows 10% Discounted Cash Flows 15%

450.00 430.43
409.09 374.29
371.90 325.47
338.09 283.02
307.36 246.10
279.41 214.00
254.01 186.09
699.76 490.35

Discounted Payback 10% Discounted Payback 15%

-2550.00 Yr 1 -2569.57 Yr 1
-2140.91 Yr 2 -2195.27 Yr 2
-1769.01 Yr 3 -1869.80 Yr 3
-1430.92 Yr 4 -1586.79 Yr 4
-1123.56 Yr 5 -1340.68 Yr 5
-844.15 Yr 6 -1126.68 Yr 6
-590.13 Yr 7 -940.59 Yr 7
0.84 -450.24 Yr 8
7.84 Years 1.09
8.09 Years
Project 1:
This project is beneficial at a 5% finance rate.
As calculated with a positive NPV of $879.51
and a MIRR of 8%.
Project Number 2 Discounted Cash Flows 5% Discounted Cash Flows 10%
Initial Investment 0 -3000
Year 1 2499 2380.00 2271.82
2 461 418.14 380.99
3 245 211.64 184.07
4
5
6
7
8
9
10 Payback Period
11 -501 Yr 1
12 -40 Yr 2
13 0.16 Yr 3
14 2.16 Years
15
Sum of cash flow benefits 3205
Excess of cash flow over initial 205

Rate 5% Discounted Payback 5% Discounted Payback 10%

Rate 10% -620.00 Yr 1 -728.18 Yr 1
Rate 15% -201.86 Yr 2 -347.19 Yr 2
0.95 Yr 3 -163.12 Yr 3
IRR 5.27% 2.95 Years -0.89
3.89 Years
NPV 5% $ 9.78
NPV 10% -163.12

NPV 15% -317.28

PI 5% 1.00

PI 10% 0.95

PI 15% 0.89

MIRR 5% 5% Same as 5%

MIRR 10% 8% Less than 10%

MIRR 15% 11% Less than 15%

Discounted Cash Flows 15%
Project 2:
2173.04
348.58
161.09

Discounted Payback 15%

-826.96 Yr 1
-478.37 Yr 2
2.97 Yr 3
2.97 Years
Project Number 5 Discounted Cash Flows 5%
Initial Investment 0 $ (3,000)
Year 1 $ 420 400.00
2 $ 420 380.95
3 $ 420 362.81
4 $ 420 345.54
5 $ 420 329.08
6 $ 420 313.41
7 $ 420 298.49
8 $ 420 284.27
9 $ 420
10 $ 420 Payback Period
11 $ 420 $ (2,580) Yr 1
12 $ 420 $ (2,160) Yr 2
13 $ 420 $ (1,740) Yr 3
14 $ 420 $ (1,320) Yr 4
15 $ 420 $ (900) Yr 5
Sum of cash flow benefits 4965 $ (480) Yr 6
Excess of cash flow over initial investment 1965 1.142857143
6.02 Years
Rate 5% Discounted Payback 5%
Rate 10% -2600.00 Yr 1
Rate 15% -2219.05 Yr 2
-1856.24 Yr 3
IRR 2.59% -1510.70 Yr 4
-1181.62 Yr 5
NPV 5% $ (285.45) -868.21 Yr 6
-569.72 Yr 7
NPV 10% $ (759.33) 2.00
7.13 Years
NPV 15% -1115.32

PI 5% 0.90

PI 10% 0.75
PI 15% 0.63

MIRR 5% 4% Less than 5%

MIRR 10% 1% Less than 10%

MIRR 15% 9% Less than 15%

Discounted Cash Flows 10% Discounted Cash Flows 15%

381.82 365.22
347.11 317.58
315.55 276.16
286.87 240.14
260.79 208.81
237.08 181.58
215.53 157.89
195.93 137.30

Discounted Payback 10% Discounted Payback 15%

-2618.18 Yr 1 -2634.78
-2271.07 Yr 2 -2317.20
-1955.52 Yr 3 -2041.05
-1668.66 Yr 4 -1800.91
-1407.87 Yr 5 -1592.09
-1170.79 Yr 6 -1410.52
-955.26 Yr 7 -1252.62
4.88 -1115.32
7.84 Years 0.12
8.09 Years
Project Number 6 Discounted Cash Flows 5%
Initial Investment 0 $ (3,000)
Year 1 $ 3,300 3142.86
2 0.00
3 0.00
4 0.00
5 0.00
6 0.00
7 0.00
8 0.00
9
10 Payback Period
11 $ 300 Yr 1
12 $ 300 Yr 2
13 $ 300 Yr 3
14 $ 300 Yr 4
15 $ 300 Yr 5
Sum of cash flow benefits 4965 $ 300 Yr 6
Excess of cash flow over initial investment 1965 0
6.02 Years
Rate 5% Discounted Payback 5%
Rate 10% 142.86 Yr 1
Rate 15% 142.86 Yr 2
142.86 Yr 3
IRR 10.00% 142.86 Yr 4
142.86 Yr 5
NPV 5% $ 142.86 142.86 Yr 6
142.86 Yr 7
NPV 10% $ - #DIV/0!
7.13 Years
NPV 15% -130.43

PI 5% 1.05

PI 10% 1.00
PI 15% 0.96

MIRR 5% 10% More than 5%

MIRR 10% 10% Less than 10%

MIRR 15% 10% Less than 15%

Discounted Cash Flows 10% Discounted Cash Flows 15%

3000.00 2869.57
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00

Discounted Payback 10% Discounted Payback 15%

0.00 Yr 1 -130.43
0.00 Yr 2 -130.43
0.00 Yr 3 -130.43
0.00 Yr 4 -130.43
0.00 Yr 5 -130.43
0.00 Yr 6 -130.43
0.00 Yr 7 -130.43
#DIV/0! -130.43
7.84 Years 0.00
8.09 Years
Project Number #7 #8 DC $ Flows 5% #7 DC $ Flows 5% #8 DC $ Flows 10% #7
Initial Invest 0 -3000 -3000
Year 1 1800 -525 1714.29 -500.00 1636.36
2 1350 -90 1224.49 -81.63 1115.70
3 450 90 388.73 77.75 338.09
4 135 525 111.06 431.92 92.21
5 105 1050 82.27 822.70 65.20
6 1800 1343.19
7 3375 2398.55
8
9
10 Payback P #7 Payback P #8
11 -1200 -3525 Yr 1
12 150 -3615 Yr 2
13 0.11 -3525 Yr 3
14 1.11 Years -3000 Yr 4
15 -1950 Yr 5
Sum of cash flow benef 3840 6225 -150 Yr 6
Excess of cash flow ove 840 3225 0.04
6.04 Years
Rate 5% DC PB 5% #7 DC PB 5% #8 DC PB 10% #7
Rate 10% -1285.71 -3500 Yr 1 -1363.64
Rate 15% -61.22 -3582 Yr 2 -247.93
#7 #8 0.16 -3504 Yr 3 0.73
IRR 15.26% 11% 2.16 Years -3072 Yr 4 2.76 Years
-2249.27 Yr 5
NPV 5% $ 520.84 $1,492.47 -906.08 Yr 6
0.38 Yr 7
NPV 10% $ 247.56 $274.48 6.38 Years

NPV 15% $11.28 -$596.21 NPV Profile #7 NPV Profile #8

0% 0%
PI 5% 1% 1%
2% 2%
PI 10% 3% 3%
4% 4%
PI 15% 5% 5%
6% 6%
MIRR 5% 7% 7%
8% 8%
MIRR 10% 9% 9%
10% 10%
MIRR 15% 11% 11%
12% 12%
13% 13%
14% 14%
15% 15%
16% 16%
17% 17%
18% 18%
19% 19%
20% 20%
21% 21%
22% 22%
23% 23%
24% 24%
25% 25%
26% 26%
27% 27%
28% 28%
29% 29%
30% 30%
DC $ Flows 10% #8 DC $ Flows 15% #7 DC $ Flows 15% #8

-477.27 1565.22 -456.52

-74.38 1020.79 -68.05
67.62 295.88 59.18
358.58 77.19 300.17
651.97 52.20 522.04
1016.05 778.19
1731.91 1268.79

DC PB 10% #8 DC PB 15% (P7) DC PB 15% (P8)

-3477.27 Yr 1 -1434.78 -3456.52 Yr 1
-3551.65 Yr 2 -413.99 -3524.57 Yr 2
-3484.03 Yr 3 -118.11 -3465.40 Yr 3
-3125.45 Yr 4 -40.92 -3165.23 Yr 4
-2473.49 Yr 5 0.78 -2643.19 Yr 5
-1457.43 Yr 6 4.78 Years -1865.00 Yr 6
0.84 Yr 7 -596.21 Yr 7
6.84 Years 0.47 Yr 8
7.47 Years