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Data for capital investment problem NPV approach to capital budgeting Investment Opportunity: Purchase Price: Useful Life: Cost of Capital: Zimboozy $20,000 5 years 12.00% PV Data: YEAR 0 1 1 2 3 4 5 NPV Cash in 0 6,000 10,000 14,000 10,000 6,000 Cash out Net Flow $20,000 $ (20,000) 2,500 3,500 4,000 6,000 5,200 8,800 4,800 5,200 3,000 3,000 $ 6,500 pointage 10 10 10 10 10 10 Summary of annual cash flows YEAR 0 1 2 3 4. 5 U IRR approach to capital budgeting Cash in Cash out $20,000 $ 6,000 2,500 10,000 4,000 14,000 5,200 10,000 4,800 6,000 3,000 $ Net Flow (20,000) 3,500 6,000 8,800 5,200 3,000 6,500 Input the assumed cost of capital 20 Instructions: Analyze this investment opportunity and make a recommendation using the following 2 methods: YEAR 0 1 1 2 2 3 4 5 NPV CASH IN CASH OUT NET FLOW 20,000 (20,000) 6,000 2,500 3,500 10,000 4,000 6,000 14.000 5,200 8,800 10,000 4,800 5.200 6,000 3,000 3,000 $ 6,500 PV -20,000.00 3,500.00 6,000.00 8,800.00 5,200.00 3,000.00 6,500.00 (must be 0) * NPV * IRR Invest or not? Since the NPV is negative and IRR is less than cost of capital, project should not be selected. 20 2