In this excercise, you will evaluate two different projects using four different captial budgeting methods. There are four different questions with multiple parts, please read each questions carefully. You can see possible points for each questions in “Grade” worksheet.
Project Evaluations Q1-Q2
Year A B Project A Project B A or B or Neither
0 $ (100,000.00) $ (40,000.00) SRR (assume required return in 10%)
1 $ 35,000.00 $ 8,000.00 Payback (assume required payback period is 4 years)
2 $ 20,000.00 $ 5,000.00 NPV (assume 7% annual interest rate)
3 $ 20,000.00 $ 20,000.00 IRR
4 $ 20,000.00 $ 20,000.00 MIRR
5 $ 20,000.00 $ 20,000.00
6 $ 20,000.00 $ 20,000.00
7 $ 30,000.00
8 $ 15,000.00
9 $ 15,000.00
10 $ 15,000.00
Question 1: A farmer is comparing two different investment opportunities. Cash flows for Investment A and Investment B are listed above in column D and column E. Investment A lasts 10 periods and Investment B lasts 6 periods. Using this information calculate the simple rate of return (SRR), payback period, NPV, IRR, and MIRR for project A in Cells J3:J7 and for project B in Cells K3:K7. In Cells L3:L7 mention the project the farmer should choose based on your calcuations. [Note: assume that the required retrun is 10% for SRR method, required payback period is 3 years for Pay Back method, annual interest rate is 7% for NPV method, and investing and borrowing rate is 7% for MRR method).
Question 2: Based on your calculations, which investment should farmer choose and why? Explain in 2-3 sentences.
Answer 2:
Sensitivity Analysis Q3-4
Year A B Discount Rate NPV-A NPV-B IRR-A IRR-B
0 $ (100,000.00) $ (40,000.00) 0.00%
1 $ 35,000.00 $ 8,000.00 5.00%
2 $ 20,000.00 $ 5,000.00 10.00%
3 $ 20,000.00 $ 20,000.00 15.00%
4 $ 20,000.00 $ 20,000.00 20.00%
5 $ 20,000.00 $ 20,000.00 25.00%
6 $ 20,000.00 $ 20,000.00 30.00%
7 $ 30,000.00
8 $ 15,000.00
9 $ 15,000.00
10 $ 15,000.00
Question 3. Calculate NPV for A in Cells G3:G9 and for B in Cells H3:H9 using at different discount rates as given in Cells F3:F9. Also calculate IRR for porject A in Cell I3 and for project B in J3.
Question 4. Plot the NPV of Project A and B on the Y-axis and Rate on X-axis. Place the graph in the green box and appropriately label vertical axis, horizontal axis, IRRs for A and B, and cross-over rate indicating disagreement of NPV and IRR.
Grade
Questions Grade Grade you Earn Comments
Question 1
SSR in J3 2
SSR in K3 2
SSR recommendation in L3 2
Payback in J3 2
Payback in K3 2
Payback recommendation in L3 2
NPV in J3 2
NPV in K3 2
NPV recommendation in L3 2
IRR in J3 2
IRR in K3 2
IRR recommendation in L3 2
MIRR in J3 2
MIRR in K3 2
MIRR recommendation in L3 2
Questions 2
Explain 4
Questions 3
NPV A in G3:G9 2
NPV B in F3:F9 2
IRR A in I3 2
IRR B in J3 2
Questions 4 2
Graph (with appropriate lables and mark) 6
Total Grade 50 0