Wachowicz's Web Workout WEB EXERCISES FOR DISCERNING FINANCE STUDENTS

PART V: INVESTMENT IN CAPITAL ASSETS Chapter 13: Capital Budgeting Techniques Visit Wachowicz's Web World

 Exercise 13.1 Project Evaluation and Selection: Alternative Methods

CCH Business Owner's Toolkit contains a wealth of information on financing, taxes, regulations, laws, and marketing. Visit Financial Analysis of Major Projects to learn about alternative methods of project evaluation and selection in capital budgeting. Specifically, read about the "payback period," "net present value," and "internal rate of return" methods.
http://www.toolkit.cch.com/
http://www.toolkit.cch.com/text/p06_6500.asp

Q. According to the "Business Owner's Toolkit" what is considered the major criticism of the payback-period method? In the discussion of the "net present value" and "internal rate of return" methods, see if you can find (at least) one statement that conflicts with similar treatment in the textbook. Present both viewpoints. Which viewpoint do you think is correct? Explain.

 Exercise 13.2 Discounted Cash Flow (DCF) Techniques

The Web sites used in this exercise use Java Applets and Javascript.

The Capital Budgeting Calculator: Introduction will help you calculate payback periods (PBPs), net present values (NPVs), and internal rates of return (IRRs).

You should now be able to use the Capital Budgeting Calculator to find the PBP, NPV, and IRR for the following project assuming that the appropriate discount rate is 12 percent:

 END OF YEAR CASH FLOW O -\$100,000 1 +   34,432 2 +   39,530 3 +   39,359 4 +   32,219

Q. What answers do you get for PBP, NPV, and IRR using the Cash Flow Calculator and how do these answers compare with the answers found in the text (i.e., 2.66 years, \$10,768, and 17.14 percent)? (The dollar difference -- caused by rounding error -- between the two NPV answers should be less than \$25.)

 Exercise 13.3 Net Present Value (NPV) Profile

WIMS (WWW Interactive Mathematics Service) at wims.unice.fr provides a module that will enable you to draw, save, and print net present value (NPV) profiles. Treat NPV as the y variable and the discount rate as the x variable.

For practice, try doing an NPV profile for the following pattern of cash flows: t = 0 (-\$10,000); t = 1 (+\$5,000); and t = 2 (+\$12,000). Go to the WIMS module and click on "Go to work." At "y =" type: -10000 +5000*(1+x)^-1 +12000*(1+x)^-2. Set the "x variable" range from 0 to .50; and, set the "y variable" range from -2000 to 8000.

Use the WIMS module to draw, save, and print an NPV profile for a project having the following pattern of cash flows: (TIP: Set the "x variable" range from 0 to .20; and, set the "y variable" range from -10,000 to 50,000.)

 END OF YEAR CASH FLOW O -\$100,000 1 +   34,432 2 +   39,530 3 +   39,359 4 +   32,219

Q. By visual inspection of your NPV profile, would this project be acceptable if the appropriate hurdle rate for this project was 12 percent? Why or why not? Compare your NPV profile to Figure 13-1 in the text. What do you conclude?

 Exercise 13.4 Net Present Value (NPV) Profile and Multiple Internal Rates of Return (IRRs) -- An Example

WIMS (WWW Interactive Mathematics Service) at wims.unice.fr provides a module that will enable you to draw, save, and print net present value (NPV) profiles. Treat NPV as the y variable and the discount rate as the x variable.

For practice, try doing an NPV profile for the following pattern of cash flows: t = 0 (-\$10,000); t = 1 (+\$5,000); and t = 2 (+\$12,000). Go to the WIMS module and click on "Go to work." At "y =" type: -10000 +5000*(1+x)^-1 +12000*(1+x)^-2. Set the "x variable" range from 0 to .50; and, set the "y variable" range from -2000 to 8000.

Use the WIMS module to draw, save, and print an NPV profile for a project having the following pattern of cash flows: (TIP: Set the "x variable" range from 0 to 5; and, set the "y variable" range from -2,000 to 1,500.)

 END OF YEAR CASH FLOW O -\$ 1,600 1 + 10,000 2 -  10,000

Q. By visual inspection of your NPV profile, how many internal rates of return does this project have? Read Appendix A in Chapter 13. Now, explain how you could use this graph to decide whether to accept this project or not.

 Exercise 13.5 Net Present Value (NPV) Profile and Multiple Internal Rates of Return (IRRs) -- Another Example

WIMS (WWW Interactive Mathematics Service) at wims.unice.fr provides a module that will enable you to draw, save, and print net present value (NPV) profiles. Treat NPV as the y variable and the discount rate as the x variable.

For practice, try doing an NPV profile for the following pattern of cash flows: t = 0 (-\$10,000); t = 1 (+\$5,000); and t = 2 (+\$12,000). Go to the WIMS module and click on "Go to work." At "y =" type: -1000 +5000*(1+x)^-1 +12000*(1+x)^-2. Set the "x variable" range from 0 to .50; and, set the "y variable" range from -2000 to 8000.

Use the WIMS module to draw, save, and print an NPV profile for a project having the following pattern of cash flows: (TIP: Set the "x variable" range from 0 to 3; and, set the "y variable" range from -200 to 200.)

 END OF YEAR CASH FLOW O -\$ 1,000 1 +  6,000 2 - 11,000 3 +  6,000