Question 3: Capital Budgeting

Suggested time: 30 minutes

Top Spin company is considering investing in a roof-top solar network to generate its own power. Assume that the expected annual cash inflows from new solar network will be $50,000. A $150,000 net initial investment is required and the network has five-year useful life and 18% required rate of return. Assume that the investment will occur immediately after management approves the project.

a. For making decision on whether to approve or reject the project, compute the Net Present Value (NPV) of this new investment and analyze whether it will be accepted or rejected and why. (10 marks)

b. To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)