Overview
CAPITAL BUDGETING DECISION MAKING INSTRUCTIONS
After reading chapter twelve of the course text and watching Module 5: Week 5 tutorials, use the
Excel spreadsheet Capital Budgeting Decision Making to answer the questions below.
INSTRUCTIONS
Type your short answers directly into this document.
1. Using the Payback method, do you expect the project to pay for itself in five years when not
accounting from the time value of money? Explain
2. At the beginning of the project, what is the Net Present Value (NPV) of the project’s expected
cash flows after five years (check the cells in the NPV formula to make sure they align with the
first five years)?
3. Using the Discounted Payback Method, do you expect the project to pay for itself in five years
when accounting for the time value of money? Explain
4. Given your answers to 1-3, if your organization expects the financial benefits of the project to
pay for the project in five years, do you recommend they pursue the project? Explain your
recommendation.
5. What is the projected Internal Rate of Return (IRR) after five years? Does this result change
your recommendation (check the cells in the IRR formula to make sure they align with the first
five years)? Explain.
6. How long do you expect it to take the project to pay for itself using the Payback method?
7. How long do you expect it to take the project to pay for itself using the NPV method?
8. How long do you expect it to take the project to pay for itself using the Discounted Payback
method?
9. What is the projected IRR for the first six years of the project? What is the IRR for the first
seven years of the project (check the cells in the IRR formula to make sure they align with the
correct years)?
10. What is the Weighted Average Cost of Capital (WACC) using the input on the WACC
worksheet (tab at the bottom of the page).
11. After what period is the IRR > WACC?
12.After considering what you found in question numbers 5-11, revisit your recommendation in
question 4. Do you have any changes or additional, useful information?
13. What would you recommend if the organization is a nonprofit with an objective of paying
for the initial cost of the project in five years?
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14. What would you recommend if the organization wanted the return on the project to at least
perform as well as the general market over its first five years? Over its first seven years?
15. If you change the Discount Rate in cell G19 to 5%, how does that change your answers to
numbers 7, 8 and 11 above?
16. If you change the Discount Rate in cell G19 to 9%, how does that change your answers to
numbers 7, 8 and 11 above?
17. If the discount rate is higher, money is relatively (more or less) valuable today and (more or
less) valuable in the future (choose from more or less).