# fm12 19 - g Calculate the net cash flows for each year...

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Mini Case: 12 - 19 g. Calculate the net cash flows for each year? Based on these cash flows, what are the project’s NPV, IRR, MIRR, and payback? Do these indicators suggest that the project should be undertaken? Answer: The net cash flows are: Year 0 Year 1 Year 2 Year 3 Year 4 Initial Outlay (\$240,000) Operating Cash Flows \$106,680 \$120,450 \$93,967 \$88,680 CF Due To NOWC (\$30,000) (\$900) (\$927) (\$956) \$32,783 Salvage Cash Flows \$15,000 Net Cash Flows (\$270,000) \$105,780 \$119,523 \$93,011 \$136,463 NPV = \$88,030 IRR = 23.9% MIRR = 18.0% Payback = 2.5 h. What does the term “risk” mean in the context of capital budgeting, to what extent can risk be quantified, and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates? Answer: Risk throughout finance relates to uncertainty about future events, and in capital budgeting, this means the future profitability of a project. For certain types of projects, it is possible to look back at historical data and to statistically analyze the
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