The purpose of this assignment is to solidify your understanding on the capital budgeting

techniques (mainly Net Present Value and Internal Rate of Return). The scores of this assignment

will help in assessing the following learning goal of the course: “students successfully completing

this course will be able to apply capital budgeting techniques to evaluate long term investment

decisions of firm.

Instructions:

You are required to use a financial calculator or spreadsheet (Excel) to solve the following capital

budgeting problem (sample questions and solutions are provided for guidance):

Mandilly Industries is undertaking a series of significant cost saving changes to its operations

effective immediately. It will cost the company $2,400,000 to implement the changes today. Over

the next eight years, this will result in savings of $200,000 in each of the first two years, $500,000

in each of the three years following that, and $800,000 in each of the final three years.

(i) Develop the timeline (linear representation of the timing of cash flows).

(ii) Calculate the Payback Period (PB).

(iii) Calculate the Internal Rate of Return (IRR).

(iv) Calculate the Net Present Value (NPV) at the following required rates of return:

(a) 8% (b) 10% (c) 12% (d) 14%

(v) Calculate the Profitability Index (PI) at the following required rates of return:

(a) 8% (b) 10% (c) 12% (d) 14%

(vi) Using IRR and NPV criterion, comment if the project should be accepted or rejected at

the following required rates of return:

(a) 8% (b) 10% (c) 12% (d) 14%

(vii) Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis).

2

Grading Rubric

Learning

Objective

Subcomponent Not

Submitted

0

Does Not

Meet

Expectations

1

Meets

expectations

2

Exceeds Expectations

3

The student will Completes Completes Relevant information is

convert relevant conversion of conversion of expressed in an

information into No information information insightful mathematical

various attempt but resulting into portrayal in a way that

mathematical made mathematical mathematical contributes to a further

forms (e.g., portrayal is portrayal or deeper

equations, inappropriate understanding (e.g.,

graphs, diagrams, or inaccurate correctly develops

tables, words) timeline of cash flows

by labeling initial

investments, future

cash flows and required

rate of return)

LO#3: The The student will Calculations Calculations Calculations attempted

student will be

able to apply

capital

budgeting

techniques to

evaluate long

term investment

decisions of

firm.

calculate NPV

and IRR using a

timeline of cash

flows

No

attempt

made

are attempted

but are both

unsuccessful

and not

comprehensive

are attempted

to solve the

problem but

not

comprehensive

are essentially all

successful and

sufficiently

comprehensive to solve

the problem.

Calculations are also

presented elegantly

(e.g., correctly

identifies the values of

the initial investments

and future cash flows

with inflows and

outflows and computes

the NPV and IRR)

The student will No Draws Draws correct Draws correct

draw conclusion attempt incorrect conclusion on conclusion on the

on acceptance or made conclusion on the acceptance acceptance or rejection

rejection of an the acceptance or rejection of of an investment

investment or rejection of an investment project by correctly and

project based on an investment project but comprehensively

capital budgeting project and partially interpreting the capital

criterion incorrectly interprets the budgeting criterion

interprets the capital (e.g., correctly draws

capital budgeting conclusion by

budgeting criterion interpreting the NPV

criterion profile and indicating

capital budgeting rules:

NPV>0, NPV<0,
IRR>COC, IRR

0

(b) At required rate of return of 8%, accept the project since IRR > 8% and NPV >

0

(c) At required rate of return of 10%, reject the project since IRR <10% and NPV
<0
(d) At required rate of return of 12%, reject the project since IRR <12% and NPV
<0
(vii) NPV Profile: