Capital Budgeting

Project 4 Report                                                         Feyza Acar Ayyildiz

The goal of this project is to explore the topic of capital budgeting. The capital budget is  a  summary  of planned  investments  of  assets  that  will  last  for  more  than  a  year.  In this project, we will analyze various measures for screening projects and deciding which to accept or reject.

In part 1, we have studied Net Present Values (NPV) for Project A and project B at given cost of capitals. NPV at r= 12% is calculated as $251.79 and $248.28 for projects A and B, respectively. At r=18%, NPV values are $36.39 for A and $124.52 for B. Then, I have plotted NPV values graph for projects A and B at various costs of capital.

In Part 2, Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) values are calculated by using the excel functions. IRR values are 19.25% and 26.15%. MIRR values at 12% are 15.78% and 17.87%, respectively. At 18%, MIRR values are computed as 18.67% and 21.35%.

In Part 3, Payback period is calculated as 4.63 for A and 2.88 for B. Also, discounted payback is calculated as 5.31 for A and 3.74 for B. Finally, Profitability Index is computed as 1.67 for A and 1.43 for B.

NPV values in part 1 showed that both projects have positive values. So, if the projects are independent, both projects can be selected. If the projects are mutually exclusive, project A is more profitable at 12% and Project B is more profitable at 18%. MIRR and IRR values of B are greater than A values but both positive values. IRR and MIRR values create a conflict based on NPV values in part 1. When we checked profitability Index (PI) at 12%, project A has a higher value.  Payback and discounted payback provide indications of a project’s liquidity and risk. Project B has shorter payback periods compared to A.