Assignment:,,Part 1. Capital Budgeting Practice Problems,a. Consider the project with the following expected cash flows:,, Year Cash flow, 0 – $400,000, 1 $100,000, 2 $120,000, 3 $850,000,,If the discount rate is 0%, what is the project’s net present value? ,If the discount rate is 2%, what is the project’s net present value? ,If the discount rate is 6%, what is the project’s net present value? ,If the discount rate is 11%, what is the project’s net present value? ,What is this project’s modified internal rate of return? ,Now draw (for yourself) 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? ,,[You can’t upload the graph unto Coursenet. Look at the graph you draw and write a short paragraph stating what the graph ‘shows"]..,,b. Consider a project with the expected cash flows:,, Year Cash flow, 0 -$815,000, 1 $141,000, 2 $320,000, 3 $440,000,,What is this project’s internal rate of return? ,If the discount rate is 1%, what is this project’s net present value? ,If the discount rate is 4%, what is this project’s net present value?,,If the discount rate is 10%, what is this project’s net present value?,,If the discount rate is 18%, what is this project’s net present value?,,Now draw (for yourself) 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? ,,[You can’t upload the graph unto Coursenet. Observe the graph and write a short paragraph stating what the graph ‘shows,,c. A project requiring a $4.2 million investment has a profitability index of 0.94. What is its net present value? (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment),,

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