Chapter 10 Capital Budgeting Examples - A B C D E F G H 2 3...

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Panel A: Project Cash Flows and Cost of CapitalProject cost of capital, r, for each project:10%Initial Cost01234Project S-$10,000$5,000$4,000$3,000$1,000Project L-$10,000$1,000$3,000$4,000$6,750Panel B: Summary of Selected Evaluation CriteriaProject SProject LNPV$788.20$1,004.03IRR14.49%13.55%MIRR12.11%12.66%PI1.081.10Payback2.333.30Discounted Payback2.953.78Figure 10-2. Finding the NPV for Projects S and Lr = 10%Year =1234Project S-10,000.005,0004,0003,0001,0004,545.453,305.792,253.94683.01$788.20Long way: Sum the PVs of the CFs to find NPVYear =1234Project L-10,000.001,0003,0004,0006,750$1,004.03=NPV(B51,C62:F62)+B62Figure 10-3. Finding the IRR r = 14.49%Year =01234Project S-10,000.005,0004,0003,0001,0004,367.243,051.641,999.09582.03Sum of PVs =$0.00= NPV at r = 14.489%. NPV = 0, so IRR = 14.489%.14.49% =IRR(B90:F90) using IRR functionYear =01234Project L-10,000.001,0003,0004,0006,75013.55%=IRR(B100:F100) using IRR functionMODIFIED INTERNAL RATE OF RETURN, MIRR (Section 10.6)Figure 10-5. Finding the MIRR for Projects S and Lr = 10%Year =1234Project S-10,0005,0004,0003,0001,000$3,300$4,840$6,655-10,000Terminal Value (TV) =$15,79512.11%=RATE(F208,0,B209,F213)12.11%=MIRR(B209:F209,B206,B206)12.11%Year =1234Project L-10,0001,0003,0004,0006,750For Project L, using the MIRR function:=MIRR(B220:F220,B206,B206) =12.66%Figure 10-8. Profitability Index (PI)

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