TUTORIAL 8: CAPITAL BUDGETING

Evaluating Project:
1. NPV= PV ( cash flows)- PV ( cost of value)
2. IRR-> NPV=0

Short answer question:

At discount rate of 10% -> project B should be undertaken because B has higher NPV at 10% of k
( line B is upper than A)

Project A because at diccount rate of 13%, curve A is upper than B -> NPVa> NPVb

Project A because IRRa > IRRb (18%>15%)

Project A
From discount rate of > 11.5%, IRRa > IRRb
NPVa >NPVb
 Yeild the same decision

From discount rate of (0;11.5%), IRRa > IRRb

MPVa< NPVb
 Provide conflict decision

Using NPV methods -> choose project B (NPVb>NPVa at 10%) ( NPV methods -> more reliable)

Project A because both IRR and NPV of A is higher than B

Project B has larger cash flow in the later year

At crossorer zero rate (11.5%), NPVa=NPVb

Independent project: choose all projects having NPV >0, IRR>WACC

Mutually exclusive: choose a project which has highest NPV

Reinvestment rate used in IRR calculation is IRR

In NPV calculation is discount rate
NPV is more realistic, NPV give the exact amount of money, IRR give the %
NPV assumer reinvestment of future cash flows at the cost of capital -> maximize the value of
firm

IRR give many results

Sometimes, we cannot identify IRR

Project;s liquidity: payback and discounted payback

Profitability: NPV and IRR
Part 2: Problem: