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2020-10-31 - Prob7-23 - Capital Budget Decision

The document discusses using the what-if analysis (goal seek) function to calculate internal rate of return (IRR). It provides an example of setting the net present value (NPV) equal to 0 and allowing the goal seek function to find the discounted rate. The example lists cash flows over 5 years, with an initial investment of $170,000 and annual cash inflows of $60,000. It shows the calculations to find the IRR of approximately 15.3%.

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Alenne Felizardo
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53 views31 pages

2020-10-31 - Prob7-23 - Capital Budget Decision

The document discusses using the what-if analysis (goal seek) function to calculate internal rate of return (IRR). It provides an example of setting the net present value (NPV) equal to 0 and allowing the goal seek function to find the discounted rate. The example lists cash flows over 5 years, with an initial investment of $170,000 and annual cash inflows of $60,000. It shows the calculations to find the IRR of approximately 15.3%.

Uploaded by

Alenne Felizardo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Note: For IRR you have to use What If Analysis (Goal Seek): Set NPV = 0, Input amount of Yea

Discount Rate (r) 16.0%


Time (t) 5
Growth Rate (g) 10%

Name Year
0
Annuity - Stream of Constant Cash Flow 1-5
Perpetuity of a Constant Cash Flow Inf
PV of a Growing Annuity ++
PV of an Annuity Due ->|
1
2
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5
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t If Analysis (Goal Seek): Set NPV = 0, Input amount of Years or other information and leave Goal Seek to find the Discounted R

Innitial Investment $ 170,000.00 PPI


Annual Cash Inflows $ 60,000.00 Depreciation Charges
Payback Period (periods) 2.83 SRR
(1) (2) (1) + (2) = (3)
(Outflows) Inflows Total Cash Flow
$ (170,000.00) $ (170,000.00)
$ (190,000.00) $ 250,000.00 $ 60,000.00
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Seek to find the Discounted Rate (r).

$ 0.16
$ 34,000.00
15.3%

(4) (3) x (4)


Discount Factor PV of the Cash Flow
1.000 $ (170,000.00)
3.274 $ 196,440.00
6.250 $ -
3.89 $ -
3.798 $ -
0.862 $ -
0.743 $ -
0.641 $ -
0.552 $ -
0.476 $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
- $ -
NPV $ 26,440
Note: For IRR you have to use What If Analysis (Goal Seek): Set NPV = 0, Input amount of Years or

Round Discount Facotrs?


Discount Rate (r) 16% Innitial Investment
Time (t) 5 Annual Cash Inflows
Growth Rate (g) 10% Payback Period (periods)
Discount Factor (# Digits) 3
(1)
Name Year (Outflows)
0 $ (380,000.00)
Annuity - Stream of Constant Cash Flow 1-5 $ (220,000.00)
Perpetuity of a Constant Cash Flow Inf
PV of a Growing Annuity ++
PV of an Annuity Due ->|
1
2
3
4
5
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7
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0, Input amount of Years or other information and leave Goal Seek to find the Discounted Rate (r).

$ 380,000.00 PPI $ 0.12


$ 130,000.00 Depreciation Charges $ 76,000.00
2.92 SRR 14.2%

(2) (1) + (2) = (3) (4)


Inflows Total Cash Flow Discount Factor
$ (380,000.00) 1.000
$ 350,000.00 $ 130,000.00 3.274
$ - 6.250
$ - 3.89
$ - 3.798
$ - 0.862
$ - 0.743
$ - 0.641
$ - 0.552
$ - 0.476
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
$ - -
Annual Cash Inflows $ (250,000.00) NPV
Discounted Rate (r).

(3) x (4)
PV of the Cash Flow
$ (380,000.00)
$ 425,620.00
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ 45,620

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