W4_TDA_Capital_Budgeting_Exercise_Solution(1)

W4_TDA_Capital_Budgeting_Exercise_Solution(1) - 56,000 5...

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4b22c0d44e26af10ca38f15c287fc27067b0c0b4.xls 1 02/07/2012 BUSN 278 Week 3 Capital Budgeting Exercise Project A: Even cash flows Year 0 1 2 3 4 5 Income Statement net income $8,400 $8,400 $8,400 $8,400 $8,400 Investment salvage value $22,000 $6,600 $6,600 $6,600 $6,600 $6,600 After tax cash flows (55,000) $15,000 $15,000 $15,000 $15,000 $37,000 Cost of capital 6.0% Year 5 Investment salvage value $22,000 Present value of cash inflows $79,625 $(55,000) NPV net present value $24,625 IRR 19.1% PI 1.45 Payback in yrs 3.67 ARR 15.3% Project B: Uneven cash flows Year 0 1 2 3 4 5 Accounting net income $4,400 $6,400 $8,400 $10,400 $12,400 Investment salvage value $22,000 $6,600 $6,600 $6,600 $6,600 $6,600 After tax cash flows (55,000) 11,000 13,000 15,000 17,000 $41,000 Cost of capital 6.0% Present value of cash inflows $78,645 Year 5 Investment salvage value $22,000 $(55,000) NPV net present value $23,645 IRR 17.7% PI 1.43 ARR 15.3% Payback in yrs 3.94 Payback table >>> Yr Investment Ann CF Cum CF 0 55,000 1 11,000 11,000 2 13,000 24,000 3 15,000 39,000 4 17,000
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Unformatted text preview: 56,000 5 41,000 97,000 SCENARIO: Yabba Dabba Do Inc. can invest $55,000 in two mutually exclusive projects--A or B--but not both. Its cost of capital is 6%. Solve for NPV, IRR, PI, payback, and ARR, select the better project, and state why. [TO VIEW OR HIDE THE EXCEL COMMENTS, CLICK REVIEW, SHOW ALL COMMENTS]. Annual Depreciation (initial investment - salvage value)/5 Less initial investment T (Today) (minus $) Annual Depreciation (initial investment - salvage value)/5 Less initial investment T (Today) (minus $) Decision [Select the better project and explain why]. A is selected because NPV, IRR, PI, are higher than B and the payback for A is shorter than for B. ARR is the same because the total accounting income and initial investment are the same for both projects. Author: Use the Excel Fx function =NPV and enter the interest rate, and the range of cash inflows, excluding the initial investment....
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This note was uploaded on 02/05/2012 for the course ACCT 305 taught by Professor Charlie during the Spring '11 term at University of Phoenix.

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