Select a company in which you have an interest. Choose TARGET, WALMART, or AMAZO
ID: 2639403 • Letter: S
Question
Select a company in which you have an interest. Choose TARGET, WALMART, or AMAZON.
For that company, describe a capital budgeting project (i.e., an investment in fixed assets) that might be undertaken by the company. Make sure that the project has an initial investment in Year 0, followed by a series of annual cash flows for at least seven (7) years.
1. Determine (make estimate) of the discount rate, or hurdle rate, that is appropriate for this project and explain the determination of that rate?
2. Develop your own Excel spreadsheet model that can be used to determine the Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), and Profitability Index (PI)? The Excel spreadsheet that you develop must use Excel
Explanation / Answer
Year 0 1 2 3 4 5 6 7 Cell A1 A2 A3 A4 A5 A6 A7 A8 Funds Flow (in mn) -100 10 10 20 30 40 40 30 PV@10% -100 9.09 8.26 15.03 20.49 24.84 22.58 15.39 NPV=Sum of cash flows 15.68 NPV : It is the net present value of the cash glows(outflow & inflow). A project is viable only when the NPV is positive. PI: Profitability Index shows the extent to which the income from the asset covers the cost of the asset. IRR: It is the return that makes the project break even , that is inflow=outflow. MIRR: It is the return that one gets when the inflow is reinvested in some other project for additional return. Profitability Index=PV of cash Inflow/Initial Investment=115.68/100 1.157 Using Excel formulae=IRR(A1:A7,0.01) 14% Considering the discount Rate=Reinvestment Rate=10% , Using excel MIRR=MIRR(A1:A10,10%,10%) 470%
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