Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 43

Basic Capital-Budgeting Techniques, Uneven Net Cash Inflows With Taxes, Spreadsheet Application Use the same information for this problem as you did for Exercise 12-41, except that the investment is subject to taxes and that the pre-tax operating cash inflows are as follows:

Year	Pre-tax Cash Inflow	Year	Pre-tax Cash Inflow
1	$50,000	6	$300,000
2	80,000	7	270,000
3	120,000	8	240,000
4	200,000	9	120,000
5	240,000	10	40,000

Irv Nelson has been paying 30 percent for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply.

Required Using Excel, compute for the proposed investment the:

1. Payback period for the proposed investment under the assumption that the cash inflows occur evenly throughout the year.

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2. Book rate of return based on (a) initial investment and (b) average investment.

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3. Net present value (NPV).

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4. Present value payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year.

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5. Internal rate of return (IRR).

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6. Modified internal rate of return (MIRR).

Step 1 of 12

Capital Budgeting is a process used to evaluate the various available projects to decide which project is to be proceeded with. First of all, we start process of capital budgeting with forecasting of future inflows and outflows of available projects. It is determined that what effect will it make on cash flows of the firm, and then NPV of project is calculated to determine how it would affect the value of firm. Net Present Value (NPV) means difference between present value of all inflows resulting from project and present value of outflows resulting from such project.