NPV approach to capital budgeting 2 Data for capital investment problem Investment Opportunity: BO Mach Purchase Price: $17,500 Useful Life: 5 years Cost of Capital: 14.00% PV 7 Data: YEAR 0 1 2 3 4 5 NPV Cash in Cash out Net Flow 0 $17,500 $ (17,500) 8,000 5,000 3,000 9,000 5,000 4,000 10,000 5,000 5,000 11,000 5,000 6,000 13,000 5,000 8,000 $ 8,500 pointage 10 10 10 10 10 10 10 10 11 Summary of annual cash flows 12 13 YEAR 0 1 2 IRR approach to capital budgeting Cash in Cash out Net Flow $17,500 $ (17,500) 8,000 5,000 3,000 9,000 5,000 4,000 10,000 5,000 5,000 11,000 5,000 6,000 13,000 5,000 8,000 $ 8,500 17 18 20 Input the assumed cost of capital 20 21 22 Instructions: 23 24 Analyze this investment opportunity and make a recommendation using the following 2 methods: YEAR 0 1 2 3 4 5 NPV CASH IN CASH OUT NET FLOW PV 17,500 (17,500) -17,500.00 8,000 5,000 3,000 3,000.00 9,000 5,000 4,000 4,000.00 10,000 5,000 5,000 5,000,00 11,000 5,000 6,000 6,000.00 13,000 5,000 8,000 8,000.00 8,500 8,500.00 (ent by ) 26 27 - NPV IRR 28 23 10 31 Invest or not? 22 33 100 24