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Respond to four questions and solve two computational problems about the capital budgeting process.
The capital budgeting process is a method used by organizations to evaluate their investment in various projects, such as buying new machinery or expanding into a new plant. You will benefit from being able to demonstrate the use of the capital budgeting process, including the following techniques and terms:
Net present value (NPV) method.
Internal rate of return (IRR) method.
Modified internal rate of return (MIRR) method.
Payback period.
Discounted payback period.
Profitability index.
Respond to the questions and complete the problems.
Questions
In a Word document, respond to the following. Number your responses 1–4.
Explain the net present value (NPV) method for determining a capital budgeting project’s desirability. What is the acceptance benchmark when using NPV?
Explain the payback period statistic. What is the acceptance benchmark when using the payback period statistic?
Describe the internal rate of return (IRR) as a method for deciding the desirability of a capital budgeting project. What is the acceptance benchmark when using IRR?
Describe the modified internal rate of return (MIRR) as a method for deciding the desirability of a capital budgeting project. What are MIRR’s strengths and weaknesses?
Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.
Problems
In either a Word document or Excel spreadsheet, complete the following problems.
You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
If you choose to solve the problems algebraically, be sure to show your computations.
If you use a financial calculator, show your input values.
If you use an Excel spreadsheet, show your input values and formulas.
Based on the cash flows shown in the chart below, compute the NPV for Project Huron. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.
Project Huron
Time 0 1 2 3 4
Cash Flow \$12,000 \$2,360 \$4,390 \$1,520 \$3,300
Based on the cash flows shown in the chart below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.
Project Erie
Time 0 1 2 3 4 5
Cash Flow \$12,000 \$2,360 \$4,390 \$1,520 \$980 \$1,250

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