Explain Capital budgeting involves calculation of net present value
Capital Budgeting Practice Problems
consider the project with the following expected cash flows-
|
Year
|
Cash flow
|
|
0
|
-$ 500000
|
|
1
|
$100,000
|
|
2
|
$110,000
|
|
3
|
$550,000
|
If the discount rate is 0%, what is the project's net present value?
If the discount rate is 4%, what is the project's net present value?
If the discount rate is 8%, what is the project's net present value?
If the discount rate is 10%, what is the project's net present value?
• What is this project's internal rate of return?
*Now draw a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?
Look at the graph you draw and write a short paragraph stating what the graph "shows".