Asad Mahmood

REG# 1535103
Strategic Finance
Assignment- Capital Budgeting

Q.1 An investment project provides cash inflows of $585 per year for eight years.
What is the project payback period if the initial cost is $1,700? What if the initial
cost is $3,300? What if it is $4,900?

Answer

(a) If the initial cost is $1,700, the payback period is:Payback = 2 + ($530 /
$585) =2.91 years.

(b) For the $3,300 cost, the payback period is: Payback = $3,300 / $585
=5.64 years

(c) The initial cost is $4, 900, Payback = $4,900 / $585 = 8.38 years

Q.2 An investment project costs $10,000 and has annual cash flows of $2,900 for
six years. What is the discounted payback period if the discount rate is zero
percent? What if the discount rate is 5%? If it is 19%?

(a)R = 0%:3 + ($1,300 / $2,900) = 3.45 years Discounted payback = Regular

payback =3.45 years

(b)R = 5%:$2,900 / 1.05 + $2,900 / 1.052+ $2,900 / 1.053=

$7,897.42$2,900 / 1.054= $2,385.84 Discounted payback = 3 + ($10,000
7,897.42) / $2,385.84 =3.88 years

(c)R = 19%: $2,900

Q.3 A firm evaluates all of its projects by applying the IRR rule. If the required return
is 14%, should the firm accept the following project?

Year Cash flow

0 ($28,000)
1 12,000
2 15,000
3 11,000

Answer
IRR for this project is: 0 = $28,000 + $12,000 / (1 + IRR) + $15,000 / (1 +
IRR)2+ $11,000 / (1 + IRR)3

IRR = 17.18% Since the IRR is greater than the required return, we would
accept the project

Q.4 Slow Ride Corp. is evaluating a project with the following cash flows:-

Year Cash flow

0 ($29,000)
1 11,200
2 13,900
3 15,800
4 12,900
5 (9,400)

The company uses an 11% discount rate and 8% re-investment rate on all of its
projects. Calculate the MIRR of the project using these interest rates.

Answer

Time 0 cash flow = $29,900 $9,400 / 1.11 5

Time 0 cash flow = $35,478.44

MIRR using the discounting approach is: 0 = $35,478.44 + $11,200 / (1 + MIRR) +

$13,900 / (1 + MIRR) 2 + $15,800 / (1 + MIRR) 3 + $12,900 / (1 + MIRR)4

MIRR = 20.44%

Reinvestment approach

Time 5 cash flow = $11,200(1.08)4 + $13,900(1.08) 3 + $15,800 (1.08) 2 +

$12,900 (1.08) $9,400 Time 5 cash flow = $55,708.59

MIRR using the discounting approach is: 0 = $29,900 + $55,708.59/ (1 + MIRR) 5

$55,708.59/ $29,900 = (1 + MIRR) 5 MIRR = ($55,708.59 / $29,900) 1/5 1 MIRR =
0.1463, or 14.63%