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Prepare a break-even and sensitivity analysis using: 1) Cash flow, and 2) Present Value of cash flow. Compare the two results and explain this to
Prepare a break-even and sensitivity analysis using: 1) Cash flow, and 2) Present Value of cash flow.
Compare the two results and explain this to your CEO in a follow up memo. In he memo, please explain why computing break-even is important for capital budgeting.
Now we can work out the NPV and IRR as follows: 0 200,000 1 2 3 B Initial investment Cash flows Discount rate @9% Discount rate @ 9% Present value of cash flows NPV 100,000 1/1.09 0.92 91,743 100,000 1/1.09^2 0.84 84,168 100,000 1/1.0913 0.77 77,218 D=B*C E-D-A 253,129 53,129 The project NVP is positive which means the project is feasible in present value terms and can be safely undertaken as this will add economic value to the wealth of shareholders. Now we can work out the internal rate of return (IRR) Timeline 0 1 2 3 Cash flows -200000 100000 100000 100000 3 IRR IRR =IRR(E47:650) 23.38% Now we can work out the NPV and IRR as follows: 0 200,000 1 2 3 B Initial investment Cash flows Discount rate @9% Discount rate @ 9% Present value of cash flows NPV 100,000 1/1.09 0.92 91,743 100,000 1/1.09^2 0.84 84,168 100,000 1/1.0913 0.77 77,218 D=B*C E-D-A 253,129 53,129 The project NVP is positive which means the project is feasible in present value terms and can be safely undertaken as this will add economic value to the wealth of shareholders. Now we can work out the internal rate of return (IRR) Timeline 0 1 2 3 Cash flows -200000 100000 100000 100000 3 IRR IRR =IRR(E47:650) 23.38%Step by Step Solution
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