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Capital Budgeting if the Discount Rate Is Essay
Pages:2 (564 words)
Sources:2
Subject:Mathematics
Topic:Capital Budgeting
Document Type:Essay
Document:#8410010
Capital Budgeting
If the discount rate is 0%, the project's NPV is $670,000. If the discount rate is 2%, the project's NPV is $614,353.50. If the discount rate is 6%, the project's NPV is $514,815.60. If the discount rate is 11%, the project's NPV is $408,997.50. The project's modified internal rate of return is 39%. The chart will show that the net present value is zero will at 46%, as this is where the NPV intersects the y axis. This implies that when the discount rate is 28%, the project will have a zero NPV. This number should be equal to the internal rate of return, but of course the modified internal rate of return (MIRR) and the internal rate of return (IRR) are different numbers, because of the impacts of compounding.
For the second equation, if the discount rate is 1%, the NPV of the project is $65,358.36. If the discount rate is 4%, then the NPV of the project is $7,593.31. If the discount rate is 10%, the NPV will be -$91,776.90. If the discount rate is 18%, then NPV will be -$197,892. The MIRR for the project will be 3%. When the line is drawn, the NPV intersects with the y-axis at around 4.5%. This means that at around that point, the project's NPV will be zero. If the discount rate is higher, the project should not be undertaken. If the discount rate is lower, the project can at that point be undertaken.
To determine the NPV of this project, multiply the initial investment by the profitability index. In this case, .2 * 0.94 = $188,000. This means that while the project pays back the initial investment, it does…
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