Copy of Ch10 Tool Kit

# Copy of Ch10 Tool Kit - Panel A Project Cash Flows and Cost...

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Unformatted text preview: Panel A: Project Cash Flows and Cost of Capital Project cost of capital, r, for each project: 10% Initial Cost 1 2 3 4 Project S- \$ 1 0 ,0 \$ 5 ,0 \$ 4 ,0 \$ 3 ,0 \$ 1 ,0 Project L- \$ 1 0 ,0 \$ 1 ,0 \$ 3 ,0 \$ 4 ,0 \$ 6 ,7 5 0 Panel B: Summary of Selected Evaluation Criteria Project S Project L NPV \$78 .20 \$1,0 4.03 IRR 14.49% 13.5 % MIRR 12.1 % 12.6 % PI 1.08 1.10 Payback 3.30 Discounted Payback 2.95 3.78 Figure 10-2. Finding the NPV for Projects S and L r = 10% Year = 1 2 3 4 Project S-10,0 0.0 5,0 0 4,0 0 3,0 0 1,0 0 4,545.45 3,305.79 2,253.94 683.01 \$78 .20 Long way: Sum the PVs of the CFs to find NPV Year = 1 2 3 4 Project L-10,0 0.0 1,0 0 3,0 0 4,0 0 6,750 \$1,0 4.03 =N P V ( B5 1 ,C 6 2 :F 6 2 )+B6 2 Figure 10-3. Finding the IRR r = 14.49% Year = 1 2 3 4 Project S- 1 0 ,0 0 .0 5 ,0 4 ,0 3 ,0 1 ,0 4 ,3 6 7 .2 4 3 ,0 5 1 .6 4 1 ,9 9 .0 9 5 8 2 .0 3 S u m o f P V s = \$ 0 .0 = N P V a t r = 1 4 .4 8 9 % . N P V = 0 , so I R = 1 4 .4 8 9 % . 1 4 .4 9 % = I R ( B 9 0 : F 9 0 ) u sin g I R fu n c t io n Year = 1 2 3 4 Project L- 1 0 ,0 0 .0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 1 3 .5 % = I R ( B 1 0 : F 1 0 ) u sin g I R fu n c t io n Figure 10-4. Graph for Multiple IRRs: Project M (Mil ions of Dol ars) Year = 1 2 Project M- 1 .6 0 1 0- 1 0 r = 10% NPV =-\$0.7 4 Note: r NPV 0%-\$1.60 10%-\$0.7 4 25% \$0.0 0 = IRR #1 = 25% 1 0% \$0.894 40 % \$0.0 0 = IRR #2 = 40 % 50 %-\$0.21 MODIFIED INTERNAL RATE OF RETURN, MIRR (Section 10.6) Figure 10-5. Finding the MIRR for Projects S and L r = 1 0 % Year = 1 2 3 4 Project S- 1 0 ,0 5 ,0 4 ,0 3 ,0 1 ,0 \$ 3 ,3 0 \$ 4 ,8 4 0 \$ 6 ,6 5- 1 0 ,0 T e rm in a l V a lu e ( T V ) = \$ 1 5 ,7 9 5 1 2 .1 % = R A T E ( F 2 0 8 ,0 ,B 2 0 9 ,F 2 1 3 ) 1 2 .1 % = M I R ( B 2 0 9 : F 2 0 9 ,B 2 0 6 ,B 2 0 6 ) 1 2 .1 % Year = 1 2 3 4 Project L- 1 0 ,0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 For Project L, using the MIRR function: = M I R ( B 2 0 : F 2 0 ,B 2 0 6 ,B 2 0 6 ) = 1 2 .6 % Notes: NPV PROFILES (Section 10.7) Figure 10-6. NPV Profile for Project S C o st o f c a p it a l = 1 0 .0 % Year = 1 2 3 4 Project S- 1 0 ,0 0 .0 5 ,0 4 ,0 3 ,0 1 ,0 r 0 % \$ 3 ,0 0 .0 5 % 1 ,8 0 4 .2 4 1 0 % 7 8 .2 0 1 4 .4 8 9 % 0 .0 N P V = \$ 0 , so I R = 1 4 .4 8 9 % 1 5 %- 8 3 .3 0 2 0 %- 8 3 7 .1 9 The Cros over Rate Year = 1 2 3 4 Project S- \$ 1 0 ,0 \$ 5 ,0 \$ 4 ,0 \$ 3 ,0 \$ 1 ,0 Project L- 1 0 ,0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 \$ 0 \$ 4 ,0 \$ 1 ,0- \$ 1 ,0- \$ 5 ,7 5 0 1 .975% Figure 10-7. NPV Profiles for Projects S and L: Shows Why Conflict Oc urs C o st o f C a p it a l 0 % \$ 3 ,0 0 .0 \$ 4 ,7 5 0 .0 5 % 1 ,8 0 4 .2 4 2 ,6 8 2 .0 6 1 0 % 7 8 .2 0 1 ,0 4 .0 3 C ro s o v e r = 1 .9 7 5 % 4 2 8 .3 8 4 2 8 .3 8 1 3 .5 4 9 % 1 5 6 .4 0 0 .0 1 4 .4 8 9 % 0 .0- 2 4 3 .6 5 2 0 %- \$ 8 3 7 .1 9- \$ 1 ,5 1 3 .3 1 Figure 10-8. Profitability Index (PI) PV of future cash flows ÷ Initial cost \$10,78 .20 ÷ \$10,0 0 1.078 PV of future cash flows ÷ Initial cost \$1 ,0 4.03 ÷ \$10,0 0 1.10 4 Notes: 2. PI and NPV rankings wil be consistent if the projects have the same cost, as is true for S and L....
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## This note was uploaded on 03/07/2012 for the course FIN 534 taught by Professor Nalla during the Spring '08 term at Strayer.

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