1.

1 Compute NPV
1.2 Compute IRR
1.3 Loan Table
1.4 Use Excel's GOAL SEEK and a Loan Table to find the IRR of an investment.
1.5 Multiple IRRs
1.6 Retirement problem
1.7 Solver for capital budgeting
Example 1.1: Compute the NPV of an investment that costs $21,000. It pays $3,000 at the end of the first year. The payout gro
of 5% per year over the next 5 years and then at a rate of 4% per year over the following 5 years. Compute the NPV of the inve
the opportunity cost for an investment like this is 12%.

Discount Rate 12%

Growth Rate1 5%
Growth Rate2 4%
NPV $ 568 #VALUE!

Year Cash Flow

0 $ (21,000)
1 $ 3,000
2 $ 3,150 #VALUE!
3 $ 3,308
4 $ 3,473
5 $ 3,647
6 $ 3,829
7 $ 3,982 #VALUE!
8 $ 4,141
9 $ 4,307
10 $ 4,479
11 $ 4,658
d of the first year. The payout grows at a rate
ars. Compute the NPV of the investment if
Example 1.2: Compute the IRR of the investment in the previous example.
(The investment costs $21,000. It pays $3,000 at the end of the first year. The payout grows at a rate of 5% per year over the n
then at a rate of 4% per year over the following 5 years. The opportunity cost for an investment like this is 12%.)

Discount Rate 12%

Growth Rate1 5%
Growth Rate2 4%
IRR 12.57% #VALUE!
NPV at IRR $ - #VALUE!

Year Cash Flow

0 $ (21,000)
1 $ 3,000
2 $ 3,150 #VALUE!
3 $ 3,308
4 $ 3,473
5 $ 3,647
6 $ 3,829 #VALUE!
7 $ 3,982 #VALUE!
8 $ 4,141
9 $ 4,307
10 $ 4,479
11 $ 4,658
s at a rate of 5% per year over the next 5 years and
ment like this is 12%.)
Example 1.3: Let us check by creating a LOAN TABLE that the IRR of the investment in the previous example = Rate of return p
(The investment costs $21,000. It pays $3,000 at the end of the first year. The payout grows at a rate of 5% per year over the n
then at a rate of 4% per year over the following 5 years. The opportunity cost for an investment like this is 12%.)

Discount R 12%
Growth Rate1 5%
Growth Rate2 4%
IRR 12.57% #VALUE!
NPV at IRR $ - #VALUE!

Year Cash Flow

Principal at Payment
the at the
beginning of end of
0 $ (21,000) Year the year the year Interest paid
1 $ 3,000 1 $ 21,000 $ 3,000 $ 2,639
2 $ 3,150 #VALUE! 2 $ 20,639 $ 3,150 $ 2,594
3 $ 3,308 3 $ 20,083 $ 3,308 $ 2,524
4 $ 3,473 4 $ 19,299 $ 3,473 $ 2,425
5 $ 3,647 5 $ 18,251 $ 3,647 $ 2,293
6 $ 3,829 #VALUE! 6 $ 16,898 $ 3,829 $ 2,123
7 $ 3,982 #VALUE! 7 $ 15,192 $ 3,982 $ 1,909
8 $ 4,141 8 $ 13,120 $ 4,141 $ 1,649
9 $ 4,307 9 $ 10,627 $ 4,307 $ 1,335
10 $ 4,479 10 $ 7,656 $ 4,479 $ 962
11 $ 4,658 11 $ 4,138 $ 4,658 $ 520
ous example = Rate of return paid by the investment.
a rate of 5% per year over the next 5 years and
like this is 12%.)

Principal at
Principal the end of
paid the year
$ 361 $ 20,639
$ 556 $ 20,083
$ 784 $ 19,299
$ 1,048 $ 18,251
$ 1,353 $ 16,898
$ 1,705 $ 15,192
$ 2,073 $ 13,120
$ 2,493 $ 10,627
$ 2,971 $ 7,656
$ 3,517 $ 4,138
$ 4,138 $ (0)
Example 1.4: Use Excel's GOAL SEEK with a Loan Table to find the IRR of an investment.
The initial investment in a project is $1,000,000. The estimted cash flows are $300,000 per year over the next five years.

IRR 15.24%

Year Cash Flow

Principal at the Payment at

beginning of the end of
0 $ (1,000,000) Year the year the year
1 $ 300,000 1 $ 1,000,000 $ 300,000
2 $ 300,000 2 $ 852,382 $ 300,000
3 $ 300,000 3 $ 682,270 $ 300,000
4 $ 300,000 4 $ 486,236 $ 300,000
5 $ 300,000 5 $ 260,330 $ 300,000
er year over the next five years.

Principal Principal at the

Interest paid paid end of the year
$ 152,382 $ 147,618 $ 852,382
$ 129,888 $ 170,112 $ 682,270
$ 103,966 $ 196,034 $ 486,236
$ 74,094 $ 225,906 $ 260,330
$ 39,670 $ 260,330 $ 0
 A B C D E F G H I
1 Example 1.5: (Same as EoC Exercise 4)
2 (A) Compute the NPV of these cash flows for a discount rate of 0%, 4%, 8%, 12%, 68%.
3 (B) Compute the IRRs possible for the cash flows below?
4 (C) Would you invest if the opportunity cost is 20%?
5 Discount Rate NPV
6 Year Cash flow 0% -100.0 #VALUE!
7 0 -500 4% -30.0
8 1 600 8% 17.3
9 2 300 12% 48.1
10 3 300 16% 66.7
11 4 200 20% 76.5
12 5 -1000 24% 79.8
13 28% 78.4
14 IRR1 6.34% #VALUE! 32% 73.5
15 IRR2 60.20% #VALUE! 36% 66.2
16 40% 57.1
17 44% 46.8
18 48% 35.8
19 52% 24.2
20 56% 12.4
21 60% 0.6
22 64% -11.2
23 68% -22.9
24
25 100.0
26
27 50.0
28
29 0.0
0% 10% 20% 30% 40% 50% 60% 70% 80%
30
-50.0

-100.0 Ex1.5

-150.0
 100.0

50.0

0.0
0% 10% 20% 30% 40% 50% 60% 70% 80%
A B C D E F G H I
31 -50.0
32
33 -100.0
34
35 -150.0

Ex1.5
Example 1.6: A RETIREMENT PROBLEM -- You are 55 years old and intend to retire at 60. You are starting a retirement a/c now
starting today and at the beginning of each of the next 4 years. You anticipate living 8 more years after retirement. You'd like t
beginning of each of those 8 years. Every year your account will earn 8% per year. How much do you need to deposit?

Interest 8%
Annual Deposit $ 29,387
Annual Withdrawal upon Retirement $ 30,000

A/C Bal. at Deposit at Interest

the the Earned Total in A/C
Beginning Beginning of during at the end
Age Year of the Year the Year the Year of the year
55 0 0 29386.5804 2350.926 31737.5068
56 1 31737.507 29386.5804 4889.927 66014.0142
57 2 66014.014 29386.5804 7632.048 103032.642
58 3 103032.64 29386.5804 10593.54 143012.76
59 4 143012.76 29386.5804 13791.95 186191.288
60 5 186191.29 $ (30,000) 12495.3 168686.591
61 6 168686.59 $ (30,000) 11094.93 149781.518
62 7 149781.52 $ (30,000) 9582.521 129364.04
63 8 129364.04 $ (30,000) 7949.123 107313.163
64 9 107313.16 $ (30,000) 6185.053 83498.216
65 10 83498.216 $ (30,000) 4279.857 57778.0732
66 11 57778.073 $ (30,000) 2222.246 30000.3191
67 12 30000.319 $ (30,000) 0.025528 0.0000
 are starting a retirement a/c now. You intend to make a deposit in this
years after retirement. You'd like to withdraw $30,000 per year at the
h do you need to deposit?
A. A company is considering investing in several projects. It can choose multiple
projects subject to the constraints that the total cost in a year cannot exceed the "Total cost
allowed" for that year. Which projects should the company invest in?
(The company cannot invest in a partial project.)

---------------- C o s t ---------------
NPV Year 1 Year 2 Year 3 Undertake
Project 1 85 30 14 7 1
Project 2 69 35 17 7 0
Project 3 130 46 26 20 0
Project 4 116 40 20 12 1
Project 5 70 31 16 8 1
Project 6 140 42 29 22 1
Project 7 93 30 17 8 1
Project 8 57 30 16 6 0
Project 9 53 28 15 5 0
Project 10 93 25 5 5 1

Total Cost Allowed 200 150 150

NPV or Cost 597 198 101 62 #VALUE!

B. Suppose the company must undertake project 8 if it undertakes project 4.

Which projects should the company invest in? Project 4
1
0
0

Project 4 <= Project 8

 Project 8
1
0
1

Project 4 <= Project 8

A. A company is considering investing in several projects. It can choose multiple
projects subject to the constraints that the total cost in a year cannot exceed the "Total cost
allowed" for that year. Which projects should the company invest in?
(The company cannot invest in a partial project.)
B. Suppose the company must undertake project 8 if it undertakes project 4.
Which projects should the company invest in?
---------------- C o s t ---------------
NPV Year 1 Year 2 Year 3 Undertake2
Project 1 85 30 14 7 1
Project 2 69 35 17 7 0
Project 3 130 46 26 20 0
Project 4 116 40 20 12 1
Project 5 70 31 16 8 0
Project 6 140 42 29 22 1
Project 7 93 30 17 8 1
Project 8 57 30 16 6 1
Project 9 53 28 15 5 0
Project 10 93 25 5 5 1

Total Cost Allowed 200 150 150

NPV or Cost 584 197 101 60 #VALUE!

B. Suppose the company must undertake project 8 if it undertakes project 4.

Which projects should the company invest in? Project 4
1
0
0

Project 4 <= Project 8

 Project 8
1
0
1

Project 4 <= Project 8