Address all parts of the problem below. You need to show relevant calculations for each part of
the problem, and those calculations should be done using Excel functions/formulas. For any
time value computations, you must use the NPV function in Excel, as appropriate. Your
explanations should also be placed in the same Excel workbook. Please upload only one Excel
file with all of Name your file your last name_Assign#5. The due date is 11:59PM on Friday.
Capital Budgeting
A company is considering three capital budgeting projects. Data relative to each is given
below. Each project has a life of 9 years. The company uses the Net Present Value (NPV)
method to evaluate capital budgeting projects and its discount rate is 4.75%. (60pts)
Project A Project B Project C
Initial cash outlay (cost) -$1,500,000 -$1,600,000 -$3,200,000
Cash inflows per year $120,000 $300,000 $500,000
Residual value $0 $135,000 $85,000
1. If the projects are mutually exclusive, which, if any, should the company accept? Why?
(10pts)
2. If the projects are independent, which, if any, should the company accept? Why? (10pts)
3. One of the company’s managers states “To me, no matter what else we do, Project A
needs to be our first choice because it has lowest initial outlay.” Comment on this
manager’s proposal, considering the concepts of NPV and Payback Method. (10pts)
4. Calculate the payback periods for all three projects. (10pts)




To help you with the Capital Budgeting problem, we'll break down each part, using relevant calculations in Excel. Below is an outline of the steps you would take to complete this assignment. You can implement these steps directly in an Excel workbook.

### Step 1: Set Up the Data in Excel
- **Column A:** Label for Projects (Project A, Project B, Project C).
- **Column B:** Initial cash outlay (cost).
- **Column C:** Cash inflows per year.
- **Column D:** Residual value.
- **Column E:** NPV calculation (use the `NPV` function in Excel).
- **Column F:** Payback period calculation.

### Step 2: Calculate NPV for Each Project
You can calculate the NPV using the `NPV` function in Excel. Here's how you can do it:

- **Project A:**
  ```excel
  =NPV(4.75%, B2:C2) - $B$2
  ```
  Where:
  - `4.75%` is the discount rate.
  - `B2:C2` is the range for cash inflows.
  
Repeat similar steps for Project B and C. **Remember** to include the residual value at the end of the project.

### Step 3: Answer the Questions
1. **If the projects are mutually exclusive, which, if any, should the company accept?**
   - Compare the NPVs of all three projects. The project with the highest positive NPV should be selected because it indicates the highest return on investment.
  
2. **If the projects are independent, which, if any, should the company accept?**
   - If the projects are independent, the company should accept all projects with a positive NPV because they add value to the company.

3. **Comment on the manager's proposal considering NPV and Payback Method.**
   - The manager's focus on initial outlay overlooks the importance of the NPV, which considers the time value of money. Project A may have the lowest initial cost, but if its NPV is lower, it's not the best option. The payback method focuses on how quickly you recover your initial investment, but it doesn't account for the time value of money or cash flows beyond the payback period.

4. **Calculate the payback periods for all three projects.**
   - The payback period is the time it takes for the project to recoup its initial investment from its cash inflows. You can calculate it by summing the annual cash inflows until they equal the initial outlay.

   **Example for Project A:**
   ```excel
   =Initial Outlay / Annual Cash Inflows
   ```
   If it takes more than a year to cover the initial cost, adjust your formula to include more years.

### Step 4: Implement the Formulas in Excel
Make sure to enter the relevant formulas for NPV and Payback Period in Excel, and clearly label your results and explanations.

Finally, save and upload your file with the appropriate naming convention as specified.

Do you want more details or have any questions?

Here are 5 relative questions that might expand the previous information:
1. How does the NPV calculation change if the discount rate is higher or lower?
2. What impact does the residual value have on the NPV calculation?
3. How do you calculate the NPV if cash inflows are not equal every year?
4. What would happen if the project durations were different for each project?
5. How would you prioritize the projects if the company had limited capital?

**Tip**: While the Payback Period is a useful measure, it's often better to rely on NPV for capital budgeting decisions as it incorporates the time value of money.

Learn how to solve capital budgeting problems using Net Present Value (NPV) and Payback Period methods. This detailed guide covers a hypothetical scenario with three projects, calculating NPV, evaluating mutual exclusivity, independence, and comparing initial outlays. Suitable for students and professionals studying finance and business management.

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