Activity 2-Assignment - Capital Budgeting

Using the Cash flows computed in Activity 1 for the two (2) project
investments:
One (unit) Machine and Computer package, apply the following
capital budgeting techniques to determine the acceptability of the
projects:

Project A: A new machine to manufacture new product submitted by

Production Dept.

Given:
Net Cash outlay P215,000
Net Cash inflows P 59,375
Terminal cash flow 46,250
WACC - 13%
a. Cash Payback Period
= Net Cash outlay / Net Cash inflows
= P215,000 / P 59,375
= 3.62 or 3 years and 7.44 months

b. Accounting rate of return

= Profit / Net Cash outlay
= 31,875 / P215,000
= 14.83%

c. Discounted Payback period

PV for 5 years P59,375 x 3.517 = 208,821.87
PV on the 6th year P59,375 x 0.480 = 28,500
P215,000 - 208,821.87 = 6,178.13/ 28,500 = .217 x 12 =
2.60months
DPP = 3 years and 3 months
d. Net Present Value method

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 PV of cash inflows - regular = P 59,375 x 3.998 = P 237,381.25
PV of Terminal Cash flow = 46,250 x 0.480 = 22,200.00
Total PV of cash inflows P 259,581.25
Net Cash outlays or Investment costs 215,000.00
Net Present Value P 44,581.25

e. Internal Rate of return (IRR)

Approximate IRR = P215,000 / P 59,375=3.621 (F) PV annuity =

between
16-17%
Exact IRR = 16% = 3.685 - 3.621 = 0.064
17% = 3.589
Difference 1% = 0.096
Interpolate: 16% + (0.064/ 0.096 x 1%) = 16.67%

f. Modified Internal Rate of return(MIRR)

6th year = 59,375 x 1.0 = P 59,375.00

5rd year = 59,375 x 1.13 = 67,093.75
4th year = 59,375 x 1.277 = 75,821.88
3rd year = 59,375 x 1.443 = 85,678.13
2nd year = 59,375 x 1.630 = 96,781.25
1st year = 59,375 x 1.842 = 109,368.75
Terminal Value = 494,118.76
Find Approximate MIRR = 215,000/ 494,118.76 = 0.435 (F) =
between 15-
16%
14% = 0.456 - 0.435 = 0.021
15% = 0.432
1% = 0.024

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 MIRR = 14% + ( 0.021/0.024 x 1%) = 14.88%

Project B: Computer units submitted by the Admin Department

Given:
Net Cash outlay P 145,000
Net Cash Inflows :
Y1 P73,500 ; Y2 P70,125; Y3 P66,750; Y4 P63,375
Terminal cash flow 25,000
WACC - 15%

A. Cash Payback Period

Cash outlays - P145,000

Cash inflows - 1-2 years P143,625
Remaining balance P1,375
divide by inflow in 3rd year P66,750
months recovered 0.021 x12 = 0.252 or 1 month
Cash payback period = 2 years and 1 month

B. Accounting rate of return

Average net income: 19,500 + 29,625 + 39,750 + 49,875 / 4 =

34,687.50

= Profit / Net Cash outlay

= 34,687.50 / P 145,000
= 23.92%

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 C. Discounted Payback period
Compute the present value of each cash inflows:
1st year - P73,500 x 0.870 = P63,945
2nd year - P70,125 x 0.756 = 53,014.50
3rd year - P66,750 x 0.658 =
43,921.50 Total PV (1 -3 years) =
P160,881
Remaining balance to recover = P-15,881 (P145,000 -
P160,881)
4th year - P63,375 x 0.572 = P36,250.5

months to recover: -15,881/36,250.5 = -0.44 x 12 = -5.28

months Discounted Payback period = 2 years and 3 months

D. Net Present Value method

Present value of operating cash inflows:
(P63,945 + P 53,014.50 + P 43,921.50 + P36,250.5)
P197,131.50 Present value of terminal cash flow (P25,000 x
0.572) 14,300
Total PV of cash inflows P211,431.50
Total cost of investment (NCO) 145,000
Net Cash Present Value (NPV) P 66,431.50
E. Internal Rate of return (IRR)

Average cash inflows:( P73,500 + P70,125 + P66,750 + P63,375)/4

=P
68,437.50
Approximate IRR : 145,000/68,437.50 = 2.119 (at n=4) = between
31% - 32%
Exact IRR: @ 31% - 2.130 - 2.119 = 0.011
@32% - 2.100
Difference 1% 0.030
Interpolation:

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 31% + (0.011/0.030x .01) = 31.37%

F. Modified Internal Rate of return(MIRR)

4th year = 73,500 x 1.0 = P 73,500

3rd year = 70,125 x 1.15 = 80,643.75
2nd year = 66,750 x 1.323 = 88,310.25
1st year = 63,375 x 1.521 = 96,393.38
Total Terminal value = P338,847.38

Approximate MIRR = 145,000/338,847.38 = 0.428 (F) - between

23% -
24%
Exact MIRR = 23% = 0.437 - 0.428 = 0.009
24% = 0.423
Difference 1% 0.014
Interpolate:
MIRR (Exact) = 23% + (0.009/.014 x .01) = 23.64%
Project A WAC Decisio Project B WAC Decisio
C n C n
Cash 3 years & 2 years &
ACCEP ACCEP
Payback 7.44 13% 1 month 15%
T T
Period months
Accounti
n g Rate ACCEP ACCEP
14.83% 13% 23.92% 15%
of T T
Return
Discount 3 years & 2 years &
ed 3 months ACCEP 3 months ACCEP
13% 15%
Payback T T
Period
Net 13% ACCEP 15% ACCEP
P
Present T P66,431. T
44,58
Value 50
1.2 5
method
Internal 16.67%
ACCEP ACCEP
Rate of 13% 31.37% 15%
T T
Return

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 Modified 14.88% 13% ACCEP 23.64% 15% ACCEP
Internal T T
Rate of
Return
- Based on the table above, the project B are likely acceptable and
prioritize since the decisions based on the computations, the results
are much better.

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