# (Done Paper) Module 3 – SLP CASH FLOW ESTIMATION AND CAPITAL BUDGETING Applying Various Capital Budgeting Methodologies

//(Done Paper) Module 3 – SLP CASH FLOW ESTIMATION AND CAPITAL BUDGETING Applying Various Capital Budgeting Methodologies

## (Done Paper) Module 3 – SLP CASH FLOW ESTIMATION AND CAPITAL BUDGETING Applying Various Capital Budgeting Methodologies

Module 3 – SLP
CASH FLOW ESTIMATION AND CAPITAL BUDGETING
Applying Various Capital Budgeting Methodologies
The objective of a firm is to maximize shareholder wealth. The Net
Present Value (NPV) method is one of the useful methods that help
financial managers to maximize shareholders’ wealth.
Suppose the company that you selected for the Module 1 SLP is
considering a new project that will have an initial cash outflow of
\$125,000,000. The project is expected to have the following cash inflows:
Year Cash Flow (\$)
1 2,000,000
2 3,500,000
3 13,500,000
4 89,750,000
5 115,000,000
6 120,000,000
If the project’s cost of capital (discount rate) is 12.5%, what is the project’s
NPV? Should the project be accepted? Why or why not?
You may use the following steps to calculate NPV:
1. Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 +
CF5 / (1+r)^5 + CF6 / (1+r)^6
Where the CFs are the cash flows and r = the project’s discount rate.
2. Calculate NPV
Listen
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NPV = Total PV of CF – Initial cash outflow
or -Initial cash outflow + Total PV of CF
r = Discount rate (12.5%)
If you do not know how to use Excel or a financial calculator for these
calculations, please use the present value tables.
Online Learning Center. (n.d.) Present and Future Value Tables. Retrieved
from
http://highered.mheducation.com/sites/0072994029/student_view0/present_and_futur
Also, consider reviewing http://www.tvmcalcs.com for financial calculator
tutorials.
Besides NPV, there are other capital budgeting methodologies including
the regular payback period, discounted payback period, profitability index
(PI), internal rate of return (IRR), and modified internal rate of return
(MIRR). These methodologies don’t necessarily give the same
accept/reject decisions as NPV.
If the firm has a requirement that projects are paid back within 3 years,
would the project be accepted based off the regular payback period? Why
or why not? Would the project be accepted based off the discounted
payback period? Why or why not?
What is the project’s internal rate of return (IRR)? Based off IRR, should
the project be accepted? Why or why not? Recall the project’s cost of
capital is 12.5%. What is the project’s modified internal rate of return
(MIRR)? Based off MIRR, should the project be accepted? Why or why
not?
discounted payback, PI, IRR, and MIRR? Present these
SLP Assignment Expectations
You are expected to:
• Describe the purpose of the report and provide a conclusion. An
introduction and a conclusion are important because many busy
individuals in the business environment may only read the first and the
last paragraph. If those paragraphs are not interesting, they never read
the body of the paper.
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• Answer the SLP Assignment question(s) clearly and provide necessary
details.
• Write clearly and correctly—that is, no poor sentence structure, no
spelling and grammar mistakes, and no run-on sentences.
• Provide citations to support your argument and references on a
separate page. (All the sources that you listed in the references section
must be cited in the paper.) Use APA format to provide citations and
references.
• Type and double-space the paper.
Whenever appropriate, please use Excel to show supporting computations
in an appendix, present financial information in tables, and use the data
able to write well, it’s important to present information in a professional
manner and to analyze financial information. This is part of