Week 10 Activity-Capital Budgeting Practice

CAPITAL BUDGETING Student’s Name University Name Course Number and Name Professor’s Name Date Capital Budgeting Question 1 The NPV vs. discount rate plot for Deal 1 shows a negative trend. Before conducting the analysis it is important to state that I used this excel formula to generate projections used to develop the graphs: =550,000 – 500,000 / ((1+A3/100) ^1) – 500,000 / ((1+A3/100) ^2) -500000/((1+A3/100) ^3) +1000000/((1+A3/100) ^4). My column A was populated with percentage ranges of 0% -50%. At a rate of return of 10%, the NPV is -$497,005. The graph shows that NPV remains negative across all tested discount rates from 0% to 50%. This means that the IRR is extremely low. Since the NPV is negative at 10% opportunity cost, this deal would destroy shareholder value. The deal should be rejected. Question 2 The NPV vs. discount rate plot for Deal 2 shows positive NPV values across all tested discount rates. At the required rate of return of 10%, the NPV is $48,906. However, since the NPV line never cro...