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Case study on capital budgeting with solution

29/03/2021 Client: saad24vbs Deadline: 2 Day

The investment Detective

Answer Q1:

We can rank the projects by simply inspecting the cash flows (mention bellow), yet it’s not a good measure to rank them.

We can’t rank the projects by only simple inspection of the cash flows because of the time value of money and cost of capital of companies. We use capital budgeting tools to measure financial performance of projects.

The Ranking by simply inspecting the cash flows:

Rank

1st

2nd

3rd

4th

5th

6th

7th

8th

Projects

3

5

8

4

1

7

6

2

Cash Flows

$10,000

$4,200

$4,150

$3,561

$3,310

$2,560

$2,200

$2,165

Answer Q2:

In order to rank these projects, in a purely quantitative manner, we used the following for the 8 projects:

A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. Payback Period (PP)

D. Profitability Index (PI)

A. Net Present Value (NPV)

Year

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

0

($2,000)

($2,000)

($2,000)

($2,000)

($2,000)

($2,000)

($2,000)

($2,000)

1

300.00

1,514.55

-

145.45

254.55

2,000.00

1,090.91

(318.18 )

2

272.73

276.03

-

165.29

231.40

-

743.80

(49.59)

3

247.93

123.97

-

262.96

210.37

-

225.39

45.08

4

225.39

-

-

269.79

191.24

-

61.47

239.05

5

204.90

-

-

268.24

173.86

-

43.46

434.64

6

186.28

-

-

248.37

158.05

-

-

677.37

7

169.34

-

-

226.82

143.68

-

-

1,154.61

8

466.51

-

-

207.13

130.62

-

-

-

9

-

-

-

189.15

118.75

-

-

-

10

-

-

-

172.72

107.95

-

-

-

11

-

-

-

157.72

98.14

-

-

-

12

-

-

-

143.70

89.22

-

-

-

13

-

-

-

130.64

81.11

-

-

-

14

-

-

-

119.03

73.73

-

-

-

15

-

-

-

-

67.03

-

-

-

S PV(CF)

2,073.086

1,914.545

2,393.920

2,228.222

2,129.702

2,000

2,165.041

2,182.984

NPV

73.086

(85.455)

393.920

228.222

129.702

0

165.041

182.984

Rank

6th

8th

1st

2nd

5th

7th

4th

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