BUSN278 Week 4 Notes – Capital Budgeting & Time Value of Money

BUSN278 Week 4 Notes – Capital Budgeting & Time Value of Money

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Project A Investment Required $18,000.00 Annual Cash Inflows $3,000.00 Project Life in years $10.00 Cost of Capital $0.14 Year 0 Year 1 Year 2 Year 3 Project A $(18,000.00) $3,000.00 $3,000.00 $3,000.00 Project B $(18,000.00) $2,000.00 $2,000.00 $2,000.00 The Net Present Value (NPV) Project A Project B Present Value of Inflows $15,648.35 $10,432.23 Less Investment $(18,000.00) $(18,000.00) Net Present Value $(2,351.65) $(7,567.77) Decision: Accept Project A because NPV is less of a lo The Internal Rate of Return (IRR) Project A 10.56% Project B 1.96% Decision: Accept Project A because IRR is greater tha Conclusion: Accept Project A under both ranking method
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Unformatted text preview: Project B $18,000.00 $2,000.00 $10.00 $0.14 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 $3,000.00 $3,000.00 $3,000.00 $3,000.00 $3,000.00 $3,000.00 $3,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 loss an Project B ds Year Cash Flows ($30,000) 1 $6,000 2 $5,000 3 $8,000 4 $12,000 5 $14,000 Cost of Capital 14% The Net Present Value (NPV) $28,886.39 ($30,000.00) ($1,113.61) Decision Reject project because NPV is less than zero Internal Rate of Return (IRR) 13% Decision Reject because project's IRR is less than the firm's cost o Conclusion Reject project using both ranking methods of capital...
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BUSN278 Week 4 Notes – Capital Budgeting & Time Value of Money

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