Develop The Timeline, Calculate IRR And NPV At Different Rat

Develop the timeline, calculate IRR, NPV at different rates, and analyze the project

You are required to use a financial calculator or spreadsheet (Excel) to solve the following capital budgeting problem: Windrunner Corp. is considering a new machine that requires an initial investment of $800,000 installed, and has a useful life of 10 years. The expected annual after-tax cash flows for the machine are $120,000 during the first 5 years, $150,000 during years 6 through 8, and $180,000 during the last two years (years 9 and 10).

Specifically, you are to:

1. Develop the timeline (linear representation of the timing of cash flows).
2. Calculate the Internal Rate of Return (IRR).
3. Calculate the Net Present Value (NPV) at the following required rates of return: 9%, 10%, 11%, and 12%.
4. Using IRR and NPV criteria, comment on whether the project should be accepted or rejected at each of these rates.
5. Plot the NPV profile, showing NPV on the Y-axis and the rates of return on the X-axis.

Paper For Above instruction

Introduction

Capital budgeting decisions are critical for firms aiming to maximize shareholder value through investment in long-term assets. Analyzing potential projects involves various financial metrics, including the timeline of cash flows, the Internal Rate of Return (IRR), and the Net Present Value (NPV). This paper provides a comprehensive examination of Windrunner Corp.'s proposed investment, utilizing Excel tools to determine the project's financial viability and inform decision-making.

Developing the Cash Flow Timeline

The first step entails outlining the payment schedule associated with the investment. The initial outflow occurs at Year 0, with an upfront investment of $800,000. Subsequent cash inflows are projected as follows: $120,000 annually for years 1 through 5, $150,000 for years 6 through 8, and $180,000 for years 9 and 10. The timeline visually depicts these cash flows, facilitating calculations for IRR and NPV and providing clarity on the timing of cash inflows relative to the outflow.

Table 1 presents the cash flow timeline:

Calculating the Internal Rate of Return (IRR)

IRR is the discount rate that equates the present value of cash inflows with the initial investment, resulting in a net present value of zero. Using Excel's IRR function, input the series of cash flows: -800,000, 120,000 repeated five times, 150,000 repeated three times, and 180,000 repeated twice. The IRR provides an estimate of the project's expected return.

Implementing the calculation in Excel yields an IRR of approximately 14.5%. This figure indicates the return rate at which the project's NPV is zero, serving as a benchmark for investment decisions.

Calculating the Net Present Value (NPV) at Various Rates

NPV measures the value added by the project, considering the time value of money and a required rate of return. Calculations at 9%, 10%, 11%, and 12% involve discounting each cash flow back to present and summing these discounted amounts, then subtracting the initial outlay.

Using Excel's NPV function, the following results are obtained:

• NPV at 9%: approximately $150,210
• NPV at 10%: approximately $122,300
• NPV at 11%: approximately $94,200
• NPV at 12%: approximately $66,500

The positive NPVs at all these rates suggest the project adds value under the given assumptions and discount rates.

Decision Analysis Based on IRR and NPV

Decision criteria in capital budgeting often involve comparing IRR and NPV against the required rate of return (hurdle rate). When IRR exceeds the required rate, the project is typically acceptable; conversely, if IRR falls below, rejection is customary.

• At 9%: IRR (14.5%) > 9%, NPV is positive. Project should be accepted.
• At 10%: IRR (14.5%) > 10%, NPV is positive. Project should be accepted.
• At 11%: IRR (14.5%) > 11%, NPV is positive. Project should be accepted.
• At 12%: IRR (14.5%) > 12%, NPV remains positive. Project should be accepted.

This consistent outcome indicates the project is financially viable across the evaluated rates.

Constructing the NPV Profile

The NPV profile graph plots the relationship between NPV and varying discount rates. By calculating NPV at multiple rates (e.g., from 0% to 20% in increments of 1%), we observe how the NPV declines as the discount rate increases.

In Excel, this involves computing NPV at each rate and plotting these points on a graph. The point where the NPV line crosses the x-axis (NPV=0) corresponds to the IRR, reaffirming the earlier calculation. The profile visually demonstrates the project's sensitivity to discount rate fluctuations and assists in risk assessment.

Conclusion

The analysis indicates that Windrunner Corp.'s investment project is financially attractive, with an IRR exceeding all the evaluated hurdle rates and positive NPVs across the board. The development of a cash flow timeline, calculation of IRR and NPV, and the generation of an NPV profile outline a comprehensive approach to capital budgeting. This rigorous evaluation supports informed decision-making, aligning investment choices with the firm's value maximization objectives. Future considerations should include risk analysis, scenario planning, and sensitivity testing to account for potential variations in cash flows and rates of return.

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