5
zimboozy - in class
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AA B T E Data for capital investment problem
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NPV approach to capital budgeting
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Investment Opportunity: Purchase Price: Useful Life: Cost of Capital:
Zimboozy $12,000 5 years 10.00%
YEAR 0 1 2 3 4 5 NPV
Cash in
Cash out Net Flow $12,000 $12,000 2,000 3,000 3,000 4,000 4,000 6,000 5,000 2,000 6,000 2,000 $5,000
PV $12,000
5,000 7,000 10,000 7,000 8,000
Data:
11 12 13 14 15 16 17 18 19 20 21
Summary of annual cash flows
YEAR 0 1 2 3 4 5
Cash in Cash out $12,000 5,000 2,000 7,000 3,000 10,000 4,000 7,000 5,000 8,000 6,000 $
Net Flow (12,000) 3,000 4,000 6,000 2,000 2,000 5,000
IRR approach to capital budgeting
Input the assumed cost of capital
YEAR 0 1 2
CASH IN CASH OUT NET FLOW 0 $12,000 12,000 5,000 2,000 3,000 7,000 3,000 4,000 10,000 4,000 6,000 4 7,000 5,000 2,000 5 8,000 6,000 2,000 NPV $5,000
PV $12,000
22 23 24 25 26 27 28 29 30
Instructions:
Analyze this investment opportunity and make a recommendation using the following 2 methods:
NPV IRR
(must be 0)
Invest or not?
34
data
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80%