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11 Chapter model
3/22/10 7:08 AM
2/15/2006
Chapter 11.
The Basics of Capital Budgeting
Figure 111
Net Cash Flows for Projects S and L
Year (t)
Project S
Project L
0
$(1,000)
$(1,000)
(Initial cost in Year 1)
1
500
100
2
400
300
3
300
400
4
100
675
0
1
2
3
4
Project S





$1,000
$500
$400
$300
$100
0
1
2
3
4
Project L





$1,000
$100
$300
$400
$675
We used this model to create most of the chapter exhibits (Tables and Figures).
We
pasted in a few dialog boxes for specific Excel functions and features and show them off
to the right of where they apply, but in general we encourage students who want to know
more about Excel to use the Excel Tutorial and refer to it as necessary.
We also like to
let students know that Excel models can be used to create tables and graphs that can
then be copied into Word documents, which is the way we prepared the text manuscript
for submission to the publisher.
That procedure is used often in business to prepare
reports.
Although we did not create the model for use in lectures, it could be used as such in a
classroom where a projector is attached to a computer.
The instructor could scroll
through the model and lecture on points as they come up.
This would be more useful if
the students have some familiarity with Excel, but that is not really necessary because
everything the model does can also be done with a financial calculator.
NET PRESENT VALUE & INTERNAL RATE OF RETURN
The Net Present Value (NPV) method estimates how much a potential project contributes
to shareholder wealth and is the primary capital budgeting decision criterion.
While
other capital budgeting tools are important and provide valuable information, the NPV is
clearly the dominant metric used to evaluate projects.
We use cash flow data for two projects (S and L) to illustrate NPV concepts and
calculate NPV and IRR.
Project S's cash flows come in sooner than L’s.
We assume that
the projects are equally risky and that the endofyear net cash flows have been adjusted
to reflect taxes, depreciation, and salvage values.
Expected AfterTax Net
Cash Flows, CFt
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View Full DocumentNPV and IRR Calculations for Projects S and L
Year (t)
Project S
Project L
0
$(1,000)
$(1,000)
(Initial cost in Year 1)
1
500
100
2
400
300
3
300
400
4
100
675
WACC
=
10%
Project S
0
1
2
3
4





$1,000
$500
$400
$300
$100
$454.55
$330.58
$225.39
$68.30
NPV =
$78.82
14.49%
Using Excel's NPV function:
NPV =
$78.82
Using Excel's IRR function:
IRR =
14.49%
Project L
0
1
2
3
4





$1,000
$100
$300
$400
$675
$90.91
$247.93
$300.53
$461.03
NPV =
$100.40
13.55%
Using Excel's NPV function:
NPV =
$100.40
Using Excel's IRR function:
IRR =
13.55%
These cash flows (either in table or time line form) can be used to quickly solve for NPV
by finding the PV of each cash flow, or by using the NPV function.
To find the internal
rate of return, you must use Excel's IRR function.
Expected AfterTax Net
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 Spring '10
 woo
 Management

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