CEL for Chapter 11 - LPK What functions are used to calculate values for data used in capital budgeting? Capital budgeting decisions require you to evaluate the acceptability of investment projects through the use of techniques as the Net Present Value (NPV) method, Internal Rate of Return (IRR) method, Modified Internal Rate of Return (MIRR) method etc. While these methods sound complex, Excel makes it really easy to calculate the numbers that are used in analysis of evaluating investment projects The NPV method compares the present value of cash inflows in a project with the present values cash outflows of the project. The value of the difference is called the net present value (NPV). The NPV of a given project is compared with the NPV of other projects. The general rule of thumb is to consider further a mutually exclusive or independent project if its NPV is and accept the project with the NPV. Consider the data from a possible project that you are evaluating and calculate the project's NPV (Hint: Round all calculations to two decimal places Also, be sure to enter a minus sign If the answer is negative.) A B 1 Description 8% 2 3 Data Annual Discount Rate Initial Investment cost Cash Inflow from year 1 Cash inflow from year 2 Cash inflow from year 3 - $5,000 $3,600 4 5 $4,200 $3,900 6 7 8 Net Present Value Also, be sure to enter a minus sign if the answer is negative.) A 1 2 Data Annual Discount Rate Initial Investment cost 3 Description 8% $5,000 $3,600 $4,200 $3,900 4 5 Cash inflow from year 1 Cash inflow from year 2 Cash inflow from year 3 6 7 8 Net Present Value 9 IMPORTANT NOTE: The NPV function in Excel does not include the initial investment value in its arguments. You have to manually add this value to your calculations to derive the correct value Since the initial Investment is a cash the NPV calculation would involve adding a value. Some other commonly used capital budgeting techniques are the IRR and the MIRR methods. You will learn more about them during your finance course. For the purpose of this module you should be able to understand how Excel functions can be used to calculate the values. For MIRR calculations use 4% as the rate at which the investment is financed and assume that the cash flows from the project can be reinvested at the rate of 5%. (Hint: Round all calculations to two decimal places.) EXCEL for Chapter 11 - LPK A B 1 Data Description - $2,000 2 Initial Investment cost 3 Cash inflow from year 1 $600 4 $500 Cash inflow from year 2 Cash inflow from year 3 $800 6 Cash inflow from year 4 $1,000 7 8 IRR 9 % 10 B 1 Data Description 2 Finance rate 4% 3 Reinvestment rate 5% 4 Initial Investment cost - $2,000 5 $600 6 Cash inflow from year 1 Cash inflow from year 2 Cash inflow from year 3 Cash Inflow from year 4 $500 7 $800 8 $1,000 9 MIRR 10 %