Explain capital budgeting involves calculation

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Reference no: EM1313135

Explain Capital budgeting involves calculation of net present value

Capital Budgeting Practice Problems

consider the project with the following expected cash flows-

Year	Cash flow
0	-$ 500000
1	$100,000
2	$110,000
3	$550,000

If the discount rate is 0%, what is the project's net present value?
If the discount rate is 4%, what is the project's net present value?
If the discount rate is 8%, what is the project's net present value?
If the discount rate is 10%, what is the project's net present value?

• What is this project's internal rate of return?

*Now draw a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

Look at the graph you draw and write a short paragraph stating what the graph "shows".

Reference no: EM1313135

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