Excel Computation for Capital Budgeting Essay

Words: 1854
Pages: 8
Open Document
INTRODUCTION TO
CAPITAL BUDGETING
Overview 159
7.1 The NPV Rule for Judging Investments and Projects 159
7.2 The IRR Rule for Judging Investments 161
7.3 NPV or IRR, Which to Use? 162
7.4 The “Yes–No” Criterion: When Do IRR and NPV Give the Same Answer? 163
7.5 Do NPV and IRR Produce the Same Project
Rankings? 164
7.6 Capital Budgeting Principle: Ignore Sunk Costs and
Consider Only Marginal Cash Flows 168
7.7 Capital Budgeting Principle: Don’t Forget the Effects of Taxes—Sally and Dave’s Condo Investment 169
7.8 Capital Budgeting and Salvage Values 176
7.9 Capital Budgeting Principle: Don’t Forget the Cost of Foregone Opportunities 180
7.10 In-House Copying or Outsourcing? A Mini-case
Illustrating Foregone Opportunity …show more content…
Recall from Chapter 5 that the IRR is defined as the discount rate for which the NPV equals zero. It is the compound rate of return that you get from a series of cash flows.
Here are the two decision rules for using the IRR in capital budgeting.
The IRR rule for deciding whether or not a specific investment is worthwhile: Suppose we are considering a project that has cash flows CF0, CF1, CF2, . . . , CFN . IRR is an interest rate such that
CF0 + CF1
(1 + IRR)
+ CF2
(1 + IRR)2
+ ·· ·+ CFN
(1 + IRR)N
= CF0 +
N
t=1
CFt
(1 + k)t
= 0
Rule: If the appropriate discount rate for a project is r, you should accept the project if its
IRR > r and reject it if its IRR < r.
EXCEL NOTE
EXCEL’S NPV FUNCTION VERSUS THE FINANCE
DEFINITION OF NPV
We reiterate our Excel note from Chapter 5 (p. 94): Excel’s NPV function computes the present value of future cash flows; this does not correspond to the finance notion of NPV, which includes the initial cash flow. To calculate the finance NPV concept in the spreadsheet, we have to include the initial cash flow. Hence, in cell B12, the NPV is calculated as
NPV($B$2,B6:B10)B5 and in cell C12 the calculation is NPV($B$2,C6:C10)C5.
Suppose we apply the NPV criterion to projects A and B:
1
2
3
4
5
6
7
8
9
10
11
12
A B C D
Discount rate 12%
Year Project A Project B
0 -1000 -800
1 500 420
2 500 420
3 500 420
4 500 420
5 500 420
Show More

Related Documents: Excel Computation for Capital Budgeting Essay

Decision Theory and Final Test Essay

7-6 and 7-7 ATCF Analysis . A more complete description of these computations in on the video s 23 and 24 Depreciation and Taxes. http://www.screencast-o-matic.com/watch/clVDY7x4T http://www.screencast-o-matic.com/watch/clVDrJx4P Video 24 is more comprehensive than the examples in the book. Make sure you watch such video. For video 24 you will need to have understood amortization tables from week 3. There will be a computational MS Excel home work. The questions on the test can be computational or conceptual…

Words 436 - Pages 2

Answers to Mini-Case Questions Essay

( Answers to Mini-Case Questions BioCom Inc. This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR, and PI. 1. Compute the payback period for each project. |Time of Cash Flow |Nano Test Tubes |Microsurgery Kit | |Investment |−$11,000.00 |−$11,000.00…

Words 1810 - Pages 8

Case Study on Risk and Return Essay

Powerline Network Corporation—Case Two: Risk and Return Thomas Calderone, CJ Anderson, and Megan Wegener FIN 480: Finance Capstone Course Professor Randy Lewis Spring Arbor University February 7, 2013 Powerline Network Corporation: Risk and Return Introduction The topics of risk and return are crucial to financial management because it allows a company to maximize stock value—in which risk is a determinant value, the rate of return in which investors require on various types of securities…

Words 3072 - Pages 13

Managing Information Technology (7th Edition) Essay

CONTENTS: CASE STUDIES CASE STUDY 1 Midsouth Chamber of Commerce (A): The Role of the Operating Manager in Information Systems CASE STUDY I-1 IMT Custom Machine Company, Inc.: Selection of an Information Technology Platform CASE STUDY I-2 VoIP2.biz, Inc.: Deciding on the Next Steps for a VoIP Supplier CASE STUDY I-3 The VoIP Adoption at Butler University CASE STUDY I-4 Supporting Mobile Health Clinics: The Children’s Health Fund of New York City CASE STUDY I-5…

Words 239873 - Pages 960