Capital Budgeting For IRR and NPV calculations use the PV of an Annuity sheet below Payback Method - Simplest - How long does it take to recover your investment? Investment Future cash flows or savings = years to recover investment Internal Rate of Return The percentage rate of return a project will earn Investment Future cash flows or savings; then use the the table (present value of an annuity) to find the % rate of return In the table, use the years you are given in the exercise, follow the row down to the closest number calculated above and look at the heading to get the % Net Present Value (NPV) - Does the project meet the hurd le rate? Discount the future cash flows at the predetermined rate then subtract it from the cost of the investment if the number is positive it will meet the rate of return, if not, it won't *Don't suffer ask questions if you get hung up Exercises 1. An investment in a robotics system of $75,000 will save us a net total of $22,400 per year after tax in operational expenses including depreciation for 5 years. Payback- NPV @ 8% (hurdle rate) IRR 2. An investment of $100,000 in a new server and software system will net us a savings of $20,540 per year after tax including depreciation for the next 7 years Payback NPV @ 8% (hurdle rate) IRR 3. John needs a new production machine for operations. The machine cost is $250,000 Estimated life is 7 years Additional revenue is expected to be $30,000, net of tax, per year (based upon 1,000 additional widgets produced per run) Additional efficiency labor savings per time study is $17,600 per year Additional tax savings from depreciation based upon a tax rate of 35% calculated on a straight line basis Payback NPV@8% (hurdle rate) RR Present value interest factor of an (ordinary) annuity of $1 per period at i% for n periods, PVIFA(i,n) 14% 15% 18% 20% Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 16% 17% 19% 0.962 0.917 0.840 1 0.990 0.980 0.971 0.952 0.943 0.935 0.926 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.833 1.808 1.783 1.970 1.942 1.913 1.886 1.859 1.833 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2.487 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3.240 3.902 3.808 3.717 3.630 3.465 3.312 3.102 2.914 2.690 2.639 2.589 4 3.546 3.387 3.170 3.037 2.974 2.855 2.798 2.743 3.274 4.853 3.993 3.791 3.433 3.199 2.991 5 4.713 4.580 4.452 4.329 4.212 4.100 3.890 3.696 3.605 3.517 3.352 3.127 3.058 5.601 5.242 4.767 4.486 4.231 3.889 3.784 5.795 5.417 5.076 4.917 4.623 4.355 4.111 3.998 3.685 3.589 3.498 3.410 3.326 5.206 4.564 3.922 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.033 4.868 4.712 4.423 4.288 4.160 4.039 3.812 3.706 3.605 7.652 7.325 6.733 6.463 5.747 4.968 4.639 4.487 4.344 4.207 3.837 7.020 6.210 5.971 5.535 5.335 5.146 4.799 4.078 3.954 7.435 7.108 5.328 6.802 6.515 5.995 5.759 5.537 4.946 9 8.566 8.162 7.786 6.247 5.132 4.772 4.607 4.451 4.303 4.163 4.031 5.650 8.530 8.111 6.418 6.145 5.426 4.494 10 9.471 8.983 7.722 7.360 7.024 6.710 5.889 5.216 5.019 4.833 4.659 4.339 4.192 9.253 6.495 5.687 4.836 9.787 7.887 7.139 6.805 6.207 5.029 4.656 11 10.368 8.760 8.306 7.499 5.938 5.453 5.234 4.486 4.327 6.814 6.492 9.385 7.536 7.161 5.918 5.421 5.197 4.988 4.793 4.611 4.439 12 11.255 10.575 9.954 8.863 8.384 7.943 6.194 5.660 7.487 7.103 5.842 10.635 8.358 7.904 6.750 5.583 5.342 5.118 4.533 13 12.134 11.348 9.986 9.394 8.853 6.424 6.122 4.910 4.715 7.786 7.367 8.745 6.628 6.002 5.724 14 13.004 12.106 11.296 10.563 9.899 9.295 8.244 6.982 6.302 5.468 5.229 5.008 4.802 4.611 11.938 10.380 8.559 8.061 6.811 15 13.865 12.849 11.118 9.712 9.108 7.606 7.191 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 5.405 13.578 10.838 10.106 8.313 6.604 5.668 5.162 4.938 16 14.718 12.561 11.652 9.447 8.851 7.824 7.379 6.974 6.265 5.954 4.730 9.122 7.120 6.373 5.475 4.990 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 8.544 8.022 7.549 6.729 6.047 5.749 5.222 4.775 9.372 7.702 7.250 5.033 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 8.756 8.201 6.840 6.467 6.128 5.818 5.534 5.273 4.812 6.938 4.843 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.550 6.198 5.877 5.584 5.316 5.070 12.462 9.129 7.963 7.469 5.628 5.353 5.101 20 18.046 16.351 14.877 13.590 11.470 10.594 9.818 8.514 7.025 6.623 6.259 5.929 4.870 25 22.023 30 25.808 3529.409 12.783 7.843 6.873 5.195 19.523 17.413 15.622 14.094 11.654 10.675 9.823 9.077 8.422 7.330 6.464 6.097 5.766 5.467 4.948 19.600 17.292 4.979 22.396 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 14.498 11.655 5.858 24.999 21.487 18.665 16.374 12.948 10.567 9.644 8.855 8.176 7.586 7.070 6.617 6.215 5.539 5.251 4.992 32.835 17.159 15.046 8.951 8.244 7.105 6.642 4.997 40 27.355 23.115 19.793 13.332 11.925 10.757 9.779 7.634 6.233 5.871 5.548 5.258 18.256 6.661 5.554 50 39.196 31.424 25.730 21.482 15.762 13.801 12.233 10.962 9.915 9.042 8.304 7.675 7.133 6.246 5.880 5.262 4.999 2 CON