Corporate Finance
Purpose of Assignment
The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV), internal rate of return (IRR), and the payback methods.
Format of Submission
Students can submit this assignment in Word, using tables and appropriate white space for problem presentation.
If Word is used, you can copy/paste your work from Excel, or create a table.
The memo does not require APA format to the extent of title page or a formal paper, but do use proper business format, syntax, grammar, spelling, etc.
Students can submit this assignment in Excel, you can copy/paste your memo from Word to a sheet in Excel as a picture.
Students are to submit just ONE document, in Word or Excel.
In either case, students are to show your work–formulas/inputs/answer.
If you submit in Excel, the formulas can be used to solve in Excel, thus showing your work.
The memo is a separate portion from the calculations, and the calculations should be presented separately, even if discussed in the memo.
Assignment Steps
Create a 350-word memo to management including the following:
- Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows.
- Describe the break-even point and its importance.
Describe the advantages and disadvantages of each method.
Calculate the following time value of money problems:
- If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%?
- What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%?
- What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years?
- If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of purchase?
What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years. Assume all payments are made at the end of the period.
Calculate the project cash flow generated for Project A and Project B using the NPV method.
- Which project would you select, and why?
- Which project would you select under the payback method? The discount rate is 10% for both projects.
- Use Microsoft® Excel® to prepare your answer.
- Note that a similar problem is in the textbook in Section 5.1.
Calculate the project cash flow generated for Project A and Project B using the NPV method (Show your calculations): .
Project A: Invest $10k today and receive $5k at the end of this year and for another 2 years (in 12 mos, in 24 mos, in 36 mos), for total cash inflows of $15k.
Project B: Invest $55k today and receive $20k at the end of this year and for another 2 years (in 12 mos, in 24 mos, in 36 mos), for total cash inflows of $60k.
Sample Template for Project A and Project B:
“Table showing investments and returns for Project A and Project B. Project A has $10,000 initial investment with $5,000 returns in each of the first 3 years. Project B has $55,000 initial investment with $20,000 in each of the first 3 years.”
Show all work.
Week Three Individual Assignment: Using the Payback Method, IRR and NPV
1.
If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an inter
FV = 500,000
N = 20
Hint: For this problem, you are given future value, number of periods, rate,
I = 15%
and you are solving for present value.
PMT = 0
PV=?
2.
What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%?
FV=?
N=5
Hint: For this problem, you are given present value, number of periods, rate
I = 5%
and you are solving for future value.
PMT = 0
PV = (200,000)
3.
What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years?
FV=300,000
N = 10
Hint: For this problem, you are given present value, future value, number of
I=?
payment is zero, and you are solving for rate.
PMT = 0
PV = (100,000)
4.
If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what
N = 10
I = 11%
Hint: For this problem, you are given payment amount, number of periods,
PMT = 50,000
future value is zero, and you are solving for present value.
PV = ?
* Make sure to set your calculator in “BEGIN” mode to solve this problem
5. What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years? Assu
N = 20
I=?
Hint: For this problem, you are given payment amount, number of periods,
PMT = (10,000)
and you are solving for rate.
FV = 400,000
* Make sure to set your calculator in “END” mode to solve this problem
Calculate the project cash flow generated for Project A and Project B using the NPV method. Which project
why? Which project would you select under the payback method? The discount rate is 10% for both projec
Initial Investment Year 1 Year 2 Year 3
Project A
(10,000)
5,000
5,000
5,000
Project B
(55,000) 20,000 20,000 20,000
Discount Rate
Initial Investment Year 1 Year 2 Year 3
Project A
(10,000)
5,000
5,000
5,000
Project B
(55,000) 20,000 20,000 20,000
Hint: For this problem, you are given the initial investment, and the cash inflows for three years (life o
a discount rate of 10%, and you are solving for NET present value.
Hence, calculate the present value of the cash inflows, and then subtract the initial investm
eposit today that pays an interest rate of 15%?
alue, number of periods, rate, payment is zero,
terest rate is 5%?
value, number of periods, rate, payment is zero,
00,000 in 10 years?
value, future value, number of periods,
s at a 11% discount rate, what is the value of the
nt amount, number of periods, rate,
olving for present value.
00 per year for 20 years? Assume all payments are
nt amount, number of periods, future value,
e NPV method. Which project would you select, and
nt rate is 10% for both projects. Use Microsoft Excel
Discount Rate
10%
Individual Assignment: Using the Payback Method, IRR and NPV
Purpose of Assignment
The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV)
Resources Required
Corporate Finance
Format of Submission
Students can submit this assignment in Word, using tables and appropriate white space for problem presentation.
If Word is used, you can copy /paste your work from Excel, or create a table.
The memo does not require APA format to the extent of title page or a formal paper, but do use proper business format, sy
Students can submit this assignment in Excel, you can copy/paste your memo from Word to a sheet in Excel as a picture.
Students are to submit just ONE document, in Word or Excel.
In either case, students are to show your work—formulas/inputs/ answer. If you submit in Excel, the formulas can be used to
In Word, you can create an appendix to show formulas and data inputs, and the answer in a table in the body of your memo
Points will be lost if students do not show work, do not present answer. You may earn partial credit for showing your work e
It is recommended that you use Excel to submit your work. But feel free to use the format that best works for you.
Grading Guide
Content
Created a 350-word memo to
management describing the use of internal
rate of return (IRR), net present value
(NPV) and the payback method in
evaluating project cash flows. Described
the advantages and disadvantages of
each method.
Possible Points
Met
20
Calculated the following time value of
money problems:
1. If you want to accumulate $500,000 in
20 years, how much do you need to
deposit today that pays an interest rate
of 15%?
30
2. What is the future value if you plan to
invest $200,000 for 5 years and the
interest rate is 5%?
30
3. What is the interest rate for an initial
investment of $100,000 to grow to
$300,000 in 10 years?
30
4. If your company purchases an annuity
that will pay $50,000/year for 10 years at
a 11% discount rate, what is the value of
the annuity on the purchase date if the
first annuity payment is made on the
date of purchase?
30
5. What is the rate of return required to
accumulate $400,000 if you invest
$10,000 per year for 20 years. Assume
all payments are made at the end of the
period.
30
Calculated the project cash flow generated
for Project A and Project B using the NPV
method. Which project would you select,
and why? Which project would you select
under the payback method? The discount
rate is 10% for both projects. Used
Microsoft® Excel® to prepare the answer.
Note that a similar problem is in the
textbook in Section 5.1.
30
Showed all work.
Total Available
Assignment Total
Additional comments:
200
Total Earned
Additional comments:
using net present value (NPV), internal rate of return (IRR) and the payback methods.
oblem presentation.
use proper business format, syntax, grammar, spelling, etc.
sheet in Excel as a picture.
cel, the formulas can be used to solve in Excel, thus showing your work.
able in the body of your memo/paper.
credit for showing your work even if you have the wrong answer.
t best works for you.
Partially Met
Not Met
Comments:
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