Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work. You may use Excel to work on the problems.Problem 1. Calculating net present value (NPV): Porter Incorporated has two exclusive projects, listed in the table below. Use the NPV rule to rank these two projects. If the appropriate discount rate is 13 percent, which project should be chosen?Problem 1. Calculating NPVYearProject AProject B0-$12,700-$9,4001$7,000$4,8002$5,500$3,7503$2,500$3,400Problem 2. Calculating payback period: An investment project provides cash inflows of $920 per year for eight years. Calculate the project’s payback period if the initial cost is each of the following:$4,500.$5,500.$7,000.Problem 3. Calculating internal rate of return (IRR) for cash flows: Calculate the internal rate of return for the cash flows of the two projects in the table below.Problem 3. Calculating IRR for Cash FlowsYearProject AProject B0-$4,600-$3,5001$1,400$1,2502$2,200$1,8003$2,700$1,600Problem 4. Calculating profitability index of a project: Jeff plans to open a small health club. The equipment will cost $225,000. Jeff expects that there will be after-tax cash inflows of $62,000 annually for seven years. The equipment will then be scrapped and the health club will close. At year-end of the first year, the first cash inflow occurs. The required return is 13 percent. What is the project’s profitability index? Should it be accepted?Problem 5. Calculating project NPV: Jenny’s Creamery is considering the purchase of a $27,000 ice cream maker. The ice cream maker has an economic life of eight years. Using the straight-line method, it will be fully depreciated. The machine will produce 250,000 servings per year, with each costing $1.25 to make, and priced at $1.99. The discount rate is 12 percent. The tax rate is 35 percent. Should the company make the purchase? Provide a rationale using the calculations.

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Calculating Payback and Profitability

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Complete a series of five problems in which you discount the cash flows of

alternative capital investments, compare the expected values of alternative

investments, and choose the investment that will provide maximum value for

shareholders.

Note: The assessments in this course build upon each other, so you are strongly

encouraged to complete them in sequence.

This assessment allows you to demonstrate your understanding of which costs are

important to consider and which are not.

By successfully completing this assessment, you will demonstrate your proficiency

in the following course competencies and assessment objectives:

o

o

o

Competency 1: Apply the theories, models, and practices of finance to the financial

management of the firm.

Calculate the payback period and net present value (NPV) of a project.

Calculate the internal rate of return (IRR) for the cash flows.

Calculate the profitability index of a project.

Questions to Consider

To deepen your understanding, you are encouraged to consider the questions below

and discuss them with a fellow learner, a work associate, an interested friend, or a

member of the business community.

How would you define the following capital budgeting methods: net present value

(NPV), internal rate of return (IRR), and payback period? How do they differ from

one another? What are some other capital budgeting methods? Which, if any, of the

methods might be superior to the others?

What are some concepts associated with making capital investment decisions such

as cash flows, sunk costs, or opportunity costs? Why should an investor factor these

concepts into the decision-making process?

Resources

Suggested Resources

The resources provided here are optional. You may use other resources of your

choice to prepare for this assessment; however, you will need to ensure that they

are appropriate, credible, and valid. They provide helpful information about the

topics in this unit. The MBA-FP6016 Finance and Value Creation Library Guide can

help direct your research. The Supplemental Resources and Research Resources,

both linked from the left navigation menu in your courseroom, provide additional

resources to help support you.

The following resources will provide assistance to complete the assessment.

Assessment Problems Helpful Tips [DOCX].

Excel Examples [XLS].

The following texts are designed to assist learners to master core concepts, solve

financial problems, and analyze results.

Boundless. (n.d.). Boundless finance. Retrieved from

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/

Chapter 5, “Time Value Money”.

Chapter 6, “Bond Valuation”

Chapter 7, “Stock Valuation”.

Chapter 15, “Dividends”.

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o

o

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Additional Resources for Further Exploration

The following texts are designed to assist learners to master core concepts, solve

financial problems, and analyze results.

o

o

o

o

Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance:

Core principles and applications (4th ed.). New York, NY: McGraw-Hill. – Available

from the bookstore

Chapter 7, “Net Present Value and Other Investment Rules,” pages 195229.

Chapter 8, “Making Capital Investment Decisions,” pages 230260.

Chapter 9, “Risk Analysis, Real Options, and Capital Budgeting,” pages 261286.

The text offers an introductory look at corporate finance.

Welch, I. (2017). Corporate finance (4th ed.). Retrieved from http://book.ivowelch.info/read/.

Chapter 15, “Valuation from Comparables and Financial Ratios,” pages 387-421.

Assessment Instructions

Demonstrate your understanding of financial concepts by completing the following

problems. Where appropriate, show or explain your work. You may use Excel to

work on the problems.

Problem 1. Calculating net present value (NPV): Porter Incorporated has two

exclusive projects, listed in the table below. Use the NPV rule to rank these two

projects. If the appropriate discount rate is 13 percent, which project should be

chosen?

Problem 1. Calculating NPV

Year

Project A

Project B

0

-$12,700

-$9,400

1

$7,000

$4,800

2

$5,500

$3,750

3

$2,500

$3,400

Problem 2. Calculating payback period: An investment project provides cash

inflows of $920 per year for eight years. Calculate the project’s payback period if the

initial cost is each of the following:

$4,500.

$5,500.

$7,000.

Problem 3. Calculating internal rate of return (IRR) for cash flows: Calculate the

internal rate of return for the cash flows of the two projects in the table below.

Problem 3. Calculating IRR for Cash Flows

Year

Project A

Project B

0

-$4,600

-$3,500

Problem 3. Calculating IRR for Cash Flows

Year

Project A

Project B

1

$1,400

$1,250

2

$2,200

$1,800

3

$2,700

$1,600

Problem 4. Calculating profitability index of a project: Jeff plans to open a small

health club. The equipment will cost $225,000. Jeff expects that there will be aftertax cash inflows of $62,000 annually for seven years. The equipment will then be

scrapped and the health club will close. At year-end of the first year, the first cash

inflow occurs. The required return is 13 percent. What is the project’s profitability

index? Should it be accepted?

Problem 5. Calculating project NPV: Jenny’s Creamery is considering the purchase

of a $27,000 ice cream maker. The ice cream maker has an economic life of eight

years. Using the straight-line method, it will be fully depreciated. The machine will

produce 250,000 servings per year, with each costing $1.25 to make, and priced at

$1.99. The discount rate is 12 percent. The tax rate is 35 percent. Should the

company make the purchase? Provide a rationale using the calculations.

…

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