FIN 501 Applying Various Capital Budgeting Methodologies/TUTORIALOUTL FIN 501 Applying Various Capital Budgeting Methodo | Page 2

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%)
If you do not know how to use Excel or a financial calculator for
these calculations, please use the present value tables.
Online Learning Center. (n.d.) Present and Future Value Tables.
Retrieved
from http://highered.mheducation.com/sites/0072994029/student_vie
w0/present_and_future_
value_tables.html
Also, consider reviewing http://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?