Part 1:
If the project's cost of capital (discount rate) is 12.5%, what is the project's NPV? Should the project be accepted? Why or why not?
You may use the following steps to calculate NPV:
1. Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5 + CF6 / (1+r)^6
Where the CFs are the cash flows and r = the project's discount rate.
2. Calculate NPV
NPV = Total PV of CF - Initial cash outflow
or -Initial cash outflow + Total PV of CF
r = Discount rate (12.5%)
Also, consider reviewing https://www.tvmcalcs.com for financial calculator tutorials.
Besides NPV, there are other capital budgeting methodologies including the regular payback period, discounted payback period, profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR). These methodologies don't necessarily give the same accept/reject decisions as NPV.
If the firm has a requirement that projects are paid back within 3 years, would the project be accepted based off the regular payback period?
Why or why not? Would the project be accepted based off the discounted payback period? Why or why not?
What is the project's internal rate of return (IRR)? Based off IRR, should the project be accepted? Why or why not? Recall the project's cost of capital is 12.5%. What is the project's modified internal rate of return (MIRR)? Based off MIRR, should the project be accepted? Why or
why not?
What are the advantages/disadvantages of NPV, regular payback, discounted payback, PI, IRR, and MIRR?
Part -2:
1. Assume that a company has $20 million in revenue and its cost of goods sold is 70% of its sales. Additionally, the firm has $3 million of inventories, $2 million in payables, and $2 million in receivables. What's the firm's cash conversion cycle (CCC)? What does this indicate? Do you think that the company should improve its CCC? If so, what are some ways that it can do that? If not, why do you think that's the case?
2. Assume that a firm has a payables deferral period of 40 days, an inventory conversion period of 62 days, and an average collection period of 29 days.
1 What's the firm's cash conversion cycle?
2 Assume that all of the firm's sales are on credit. If the firm has annual sales of $4 million, what's the accounts receivable investment
How many times a year will the firm turn over its inventory?