Comparison of Capital Budgeting Methods 1 Determine the payb

Comparison of Capital Budgeting Methods 1. Determine the payback period for an Investment 2. Evaluate the acceptablity of an Investment project using the net present value method. 3. Evaluate the acceptablity of an Investment project using the Internal rate of return method 4. Compute the simple rate of return for an Investment.

Solution

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		A	B	C	D	E	F	G	H
	Year	0	1	2	3	4	5	6	7
1	Initial investment	-2205000
2	Annual Cost Savings(Net operating income+Depreciation)		630000	630000	630000	630000	630000	630000	630000
3	Salvage Value								225000
4	Total Cash flow	-2205000	630000	630000	630000	630000	630000	630000	855000
5	Discount factor= 1/(1+discount rate)^t	1	0.847458	0.71818443	0.60863087	0.515789	0.437109	0.370432	0.313925
6	PV of Cash flows	-2205000	533898.31	452456.19	383437.45	324946.99	275378.81	233371.87	268405.90
A)	NPV of Cash flows =PV of Cash flows -Investment	266895.52	NPV(18%,B4:H4)+A6
B)	IRR	22.04%	IRR(A4:H4)
c)		0	1	2	3	4	5	6	7
	Total Cash flow	-2205000	630000	630000	630000	630000	630000	630000	855000
	Incremental Cash flow =incremental Cash flow of preceding year + cash flow next year	-2205000	-1575000	-945000	-315000	315000	945000	1575000	2430000
	PB= Year before positive cash flow starts +	3.50	Years		Year before positive cash flow starts +
					Incremental cash flow on year 3/ Cash flow on year 4
d)	Simple rate of return = (SUM of All cash flows -Initial Investment)/Initial Investment	110.20%