Gunnell Incorporated is considering two mutually exclusive 10-year investments. The initial cash outlays and expected net after-tax cash flows are shown below. NPV IRR Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Project 1 $(2,500,000) Project 1 200,000 200,000 235,000 280,000 325,000 % 450,000 500,000 600,000 700,000 900,000 Required: 1. Using Excel, calculate the NPV and IRR of each project. Assume Gunnell Incorporated uses a discount rate of 8%. (Round your NPV answer to the nearest dollar amount and your IRR answer to 2 decimal places (i.e. 0.1234 = 12.34%).) Project 2 $(1,800,000) 400,000 375,000 350,000 350,000 325,000 200,000 185,000 170,000 160,000 130,000 Project 2 %
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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NPV
IRR
Gunnell Incorporated is considering two mutually exclusive 10-year investments. The initial cash outlays and expected net
after-tax cash flows are shown below.
Initial
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Project 1
$(2,500,000)
Project 1
200,000
200,000
235,000
280,000
325,000
450,000
500,000
600,000
700,000
900,000
Required:
1. Using Excel, calculate the NPV and IRR of each project. Assume Gunnell Incorporated uses a discount rate of 8%. (Round your NPV
answer to the nearest dollar amount and your IRR answer to 2 decimal places (i.e. 0.1234 = 12.34%).)
%
Project 2
$(1,800,000)
400,000
375,000
350,000
350,000
325,000
200,000
185,000
170,000
160,000
130,000
Project 2
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F27c9ffc8-caf5-4a01-9236-94db3faf410c%2Fdb0e95f6-8e89-4148-91a8-686808fdbd90%2F3t81qzk_processed.png&w=3840&q=75)
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