BUS FPX 4070 Assessment 6 Evaluating Capital Expenditures

Student Name

Capella University

BUS-FPX4070 Foundations in Finance

Prof. Name:

Date

Problem 1: Capital Budgeting Criteria

Calculations

For Project A, the financial metrics are as follows:

NPV (Net Present Value): $35,823,289.78
IRR (Internal Rate of Return): 19.19%
MIRR (Modified Internal Rate of Return): 17.08%

For Project B, the financial metrics are:

NPV (Net Present Value): $35,336,432.09
IRR (Internal Rate of Return): 22.52%
MIRR (Modified Internal Rate of Return): 16.68%

Conflicts between NPV and IRR

Conflicts often arise when comparing the NPV and IRR for independent projects, which can lead to different conclusions. In this case, Project A has a higher NPV at $35,823,289.78, while Project B, despite having a higher IRR of 22.52%, presents a lower NPV. These conflicts are typically due to differences in the cash flow patterns and the size of the projects. Smaller projects may exhibit higher IRRs but lower NPVs. It is widely accepted in capital budgeting that the project with the superior NPV should generally be chosen, as NPV better accounts for the time value of money and reinvestment opportunities. Hence, despite Project B’s higher IRR, Project A remains the more attractive investment based on its higher NPV.

Problem 2: New Project Analysis

Treatment of Feasibility Fees

The feasibility fees associated with the project are $7,000. These fees are treated as a cash outlay, as they represent costs incurred in the process of evaluating the project’s viability. Thus, the accounting for these fees is as follows:

Feasibility fees: $7,000
Cash: $7,000

Initial Investment Outlay

The initial investment outlay for the new project includes the costs for the machine, installation, and net operating working capital. The total cash outlay for year 0 is calculated by summing these amounts:

Machine: $100,000
Installation: $10,000
Net operating working capital: $5,000

Thus, the total cash outlay in year 0 is $115,000.

Table: Project Financial Metrics and Calculations

Project	NPV	IRR	MIRR
Project A	$35,823,289.78	19.19%	17.08%
Project B	$35,336,432.09	22.52%	16.68%

Investment Components	Amount ($)
Machine	100,000
Installation	10,000
Net Operating Working Capital	5,000
Total Initial Outlay	115,000

References

Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Retrieved from https://capella.vitalsource.com/reader/books/9780357088562/epubcfi/6/36[%3Bvnd.vst.idref%3DM18]!/4/204/9:237[at%20%2Csho]

Finance Train. (n.d.). Corporate finance: Conflict between NPV and IRR. Retrieved from https://financetrain.com/conflict-between-npv-and-irr

FinanceKid. (2017, July 10). IRR vs MIRR – The problem with IRR explained. [Video file]. Retrieved from https://www.youtube.com/watch?v=f0IJegvYPKk