CASE11H Student Version 09/30/14

CHICAGO VALVE COMPANY

Capital Budgeting Decision Methods
This case is designed as an introduction to capital budgeting methods.
NPV, IRR, MIRR, PI, and Payback are included in the analysis.
The model develops the project's cash flows on the basis of input cost
and savings data, then calculates the above decision criteria. Note
that this model was constructed specifically for this case, and hence
project life and depreciation allowances are fixed. Press CTRL A
simultaneously to view a graph of the NPV profiles. Press CTRL B
simultaneously to view a graph of the multiple IRR project.

If you are using the student version of the model, some of the cells
have been blanked out. Before using the model, it is necessary to
fill in the empty cells with the appropriate formulas. Once this
is done, the model is ready for use.

========= ========= ========= ========= ========= ========= =============
INPUT DATA: KEY OUTPUT:
New system:
Delivered cost $200,000 NPV $0
Installation $12,500 IRR 0.0%
Salvage value $0 MIRR 0.0%
Annual savings $60,000 Payback 0.0
PI 0.00
Old system:
Current book value $0
Current market value $0
Removal cost $0
Other data:
Cost of capital 11.0%
Tax rate 40.0%
========= ========= ========= ========= ========= ========= =============
MODEL-GENERATED DATA:
Cash flows at t=0: End-of-project cash flows:
Cost of new system Salvage value ---->
Installation SV tax
-------- -----------
Total cost Total
--------
Proceeds from old equip Depreciation information:
Tax on proceeds
Removal cost (AT) Depreciable basis:
--------
Net cash flow, old
--------
Net invest. outlay
========
Annual cash flows:
Deprn A.T. Cost
Year Tax saving Saving Net CF Cum CF
---- -------- ------------ ------ ------
0
1
2
3
4
5
6
7
8
NPV: Analysis of Short-Term Project:
IRR: Cost
TV: Year 1 CF
MIRR: NPV
Payback: IRR
PI: MIRR
Data Table for effect of cost savings:
Savings NPV IRR MIRR Payback PI
40,000
50,000
60,000
70,000
80,000
Data Table for effect of cost of capital: NPV of
-------> short-term
Cap Cost NPV IRR MIRR Payback PI project
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
Data Table for effect of tax rates:
Tax rate NPV IRR MIRR Payback PI
20.0%
30.0%
40.0%
50.0%
60.0%
Analysis of the Multiple IRR Project:
Cap cost NPV CF
1 (30,000)
-10% 2 150,000
0% 3 (120,000)
10%
20% NPV =
30% IRR(1) =
40% IRR(2) =
50%
60% Note: When multiple IRRs exist, Lotus
70% reports the one closest to the
80% initial guess. Therefore, we
90% guessed 10% and 300% to obtain
100% the two IRRs.
110%
120% Also Release 2.0 will not permit
130% the use of negative costs of
140% capital, so ERR is reported for
150% k = -10%. Release 2.01 would show
160% NPV = -$11,481.5.
170%
180%
190%
200%
210%
220%
230%
240%
250%
260%
270%
280%
290%
300%
310%
320%
330%
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END
0
0
0
1
1
1
1
8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0%
N
P
V

COST OF CAPITAL
FIGURE 1
NPV-PROFILES
NPV(LARGE) NPV(SMALL)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0% 30% 60% 90% 120% 150% 180% 210% 240% 270% 300% 330%
N
P
V

Cost of Capital
FIGURE 2
Multiple IRR Illustration
NPV