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MOD 4 Case FIN

# MOD 4 Case FIN - Capital Budgeting Byron E Ferguson FIN 301...

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Capital Budgeting 1 Byron E. Ferguson FIN 301 – Principles of Finance Module 4 Case Dr. John Halstead September 18, 2010

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Capital Budgeting 2 Ways to make Capital Budgeting Decisions The goal of this module is to describe the Capital Budgeting process. Part I. Capital Budgeting Problems: A. Project expected cash flows; Year Cash Flow Formula: NPV = Rt / (1+ i ) t 0 -500,000 t - time of the cash flow 1 \$100,000 i - discount rate 2 \$110,000 Rt - the net cash flow at time or t 3 \$550,000 *Cash inflow and outflow is discounted back to present value (PV); they are summed, therefore NPV is the sum of all terms listed above at each rate below. If the discount rate is 0%, what is the project’s net present value? -500,000 If the discount rate is 4%, what is the project’s net present value? 186,803.01 If the discount rate is 8%, what is the project’s net present value? 123,507.59 If the discount rate is 10%, what is the project’s net present value? 95,041.32 What is this project’s internal rate of return? About 15% The graph illustrates as the discount rate increases, the net present value decreases. Additionally, based on the downward trend were the curve intersects the horizontal axis at about 15%, which is the IRR (the discount rate that causes NPV to equal \$0.00). If the discount rate is higher than 15%, project would have a negative NPV and should be rejected.
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MOD 4 Case FIN - Capital Budgeting Byron E Ferguson FIN 301...

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