Comparison of Capital Budgeting Methods 1. Determine the payback period for an investment. 2. Evaluate the acceptability of an investment project using the net present value method. 3. Evaluate the acceptability of an investment project using the internal rate of return method. 4. Compute the simple rate of return for an investment. 2,205,000 1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 225,000 $ 2,750,000 1,600,000 1,150,000 6 The project would provide net operating income each year as follows: Sales Variable expenses Contribution margin 10 Fixed expenses: Salaries, rent and other fixed out-of pocket costs Depreciation 13 Total fixed expenses Net operating income 520,000 350,000 870.000 280.000 S. 16 Company discount rate 18% 18 1. Compute the annual net cash inflow from the project. 20 2. Complete the table to compute the net present value of the investment, 20 2. Complete the table to compute the net present value of the investment. Year(s) 1-7 Now 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 29 Present value of the cash flows 30 Net present value 1.000 32 Use Excel's PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 36 3. Use Excel's RATE function to compute the project's internal rate of return 38 4. Compute the project's payback period. years 40 5. Compute the project's simple rate of return. A1