trident fin301 module 4 case latest 2016 november
Module 4 – Case
CAPITAL BUDGETING WITH FUNDING SOURCES
Case Assignment
This case has two separate parts.
Part I: Capital Budgeting Practice Problems
a. Consider the project with the following expected cash
flows:
Year
Cash flow
0
-$400,000
1
$100,000
2
$120,000
3 $850,000
If the discount rate is 0%, what is the project’s net
present value?
If the discount rate is 2%, what is the project’s net
present value?
If the discount rate is 6%, what is the project’s net
present value?
If the discount rate is 11%, what is the project’s net
present value?
With a cost of capital of 5%, what is this project’s
modified internal rate of return?
Now draw (for yourself) a chart where the discount rate is
on the horizontal axis (the “x” axis) and the net present value on
the vertical axis (the Y axis). Plot the net present value of the project as a
function of the discount rate by dots for the four discount rates. Connect the
four points using a free hand ‘smooth’ curve. The curve intersects the
horizontal line at a particular discount rate. What is this discount rate at
which the graph intersects the horizontal axis?
[ Look at the graph you draw and write a short paragraph stating
what the graph ‘shows’]
b. Consider a project with the expected cash flows:
