The purpose of this assignment is to solidify your understanding on the capital budgeting
techniques (mainly Net Present Value and Internal Rate of Return). The scores of this assignment
will help in assessing the following learning goal of the course: “students successfully completing
this course will be able to apply capital budgeting techniques to evaluate long term investment
decisions of firm.
Instructions:
You are required to use a financial calculator or spreadsheet (Excel) to solve the following capital
budgeting problem (sample questions and solutions are provided for guidance):
Mandilly Industries is undertaking a series of significant cost saving changes to its operations
effective immediately. It will cost the company $2,400,000 to implement the changes today. Over
the next eight years, this will result in savings of $200,000 in each of the first two years, $500,000
in each of the three years following that, and $800,000 in each of the final three years.
(i) Develop the timeline (linear representation of the timing of cash flows).
(ii) Calculate the Payback Period (PB).
(iii) Calculate the Internal Rate of Return (IRR).
(iv) Calculate the Net Present Value (NPV) at the following required rates of return:
(a) 8% (b) 10% (c) 12% (d) 14%
(v) Calculate the Profitability Index (PI) at the following required rates of return:
(a) 8% (b) 10% (c) 12% (d) 14%
(vi) Using IRR and NPV criterion, comment if the project should be accepted or rejected at
the following required rates of return:
(a) 8% (b) 10% (c) 12% (d) 14%
(vii) Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis).
2
Grading Rubric
Learning
Objective
Subcomponent Not
Submitted
0
Does Not
Meet
Expectations
1
Meets
expectations
2
Exceeds Expectations
3
The student will Completes Completes Relevant information is
convert relevant conversion of conversion of expressed in an
information into No information information insightful mathematical
various attempt but resulting into portrayal in a way that
mathematical made mathematical mathematical contributes to a further
forms (e.g., portrayal is portrayal or deeper
equations, inappropriate understanding (e.g.,
graphs, diagrams, or inaccurate correctly develops
tables, words) timeline of cash flows
by labeling initial
investments, future
cash flows and required
rate of return)
LO#3: The The student will Calculations Calculations Calculations attempted
student will be
able to apply
capital
budgeting
techniques to
evaluate long
term investment
decisions of
firm.
calculate NPV
and IRR using a
timeline of cash
flows
No
attempt
made
are attempted
but are both
unsuccessful
and not
comprehensive
are attempted
to solve the
problem but
not
comprehensive
are essentially all
successful and
sufficiently
comprehensive to solve
the problem.
Calculations are also
presented elegantly
(e.g., correctly
identifies the values of
the initial investments
and future cash flows
with inflows and
outflows and computes
the NPV and IRR)
The student will No Draws Draws correct Draws correct
draw conclusion attempt incorrect conclusion on conclusion on the
on acceptance or made conclusion on the acceptance acceptance or rejection
rejection of an the acceptance or rejection of of an investment
investment or rejection of an investment project by correctly and
project based on an investment project but comprehensively
capital budgeting project and partially interpreting the capital
criterion incorrectly interprets the budgeting criterion
interprets the capital (e.g., correctly draws
capital budgeting conclusion by
budgeting criterion interpreting the NPV
criterion profile and indicating
capital budgeting rules:
NPV>0, NPV<0,
IRR>COC, IRR
0
(b) At required rate of return of 8%, accept the project since IRR > 8% and NPV >
0
(c) At required rate of return of 10%, reject the project since IRR <10% and NPV
<0
(d) At required rate of return of 12%, reject the project since IRR <12% and NPV
<0
(vii) NPV Profile: