Calculate the net present value and discounted payback period for Project A.


Manhheim Biotechnology Limited is expanding the business by considering investing in some profitable projects. Stevenson, a project manager of Mannheim, was asked to estimate the cost of capital and evaluate the following projects:

Table 1. Project cash flows (in millions).

Year 0 1 2 3 4
Project A (100.00) 10.00 50.00 40.00 20.00
Project B (200.00) 80.00 90.00 85.00 10.00
Project C (300.00) 105.00 90.00 110.00 20.00

Albert, the chief finance officer (CFO) of Mannheim, has provided him some relevant information:

The current bond price of Mannheim's 10% coupon, semi-annual payment with 10 years left to maturity is $1,134.20. The par value of the bon is $1,000. The company's tax rate is 40%.

The current price of the preferred stock is $31.25 with annual dividend payment of $3.75.

Mannheim's common stock is currently selling for $45 per share. Its last dividend payment was $3.25 and dividend is expected to grow at a constant rate of 3% in the foreseeable future. Mannheim's beta is 1.2, the risk free rate is 6%, and the market risk premium is estimated to be 4%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4% with the yield on the Treasury bond of 6.5%.

Sharron, a finance manager of Mannheim, has $400 million capital available consisting of $160 million debt, $140 million preferred stock and $100 million common stock.

Calculate the net present value and discounted payback period for Project A.

Capital Budgeting:

Capital Budgeting is very important in construction planning. This is a tool used to minimize the period expended for the construction or acquisition of a capital asset. Also, this is used in revising a plan due to changes in environmental factors.

Answer and Explanation: 1

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Year Cash flow Factor Present value
Y0 -100 1 -100
Y1 10 0.916 9.16
Y2 50 0.839 41.95
Y3 40 0.768 30.72
Y4 20 0.703 14.06

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Learn more about this topic:

What Is Capital Budgeting? - Techniques, Analysis & Examples


Chapter 3 / Lesson 13

Learn about capital budgeting decisions with examples. See different types of capital budgeting techniques, such as payback period and internal rate of return.

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