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


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 B.

Capital Budgeting:

Capital Budgeting has an advantage for adequate control over the expenditure of the company. It increases shareholder's wealth and improves market holding. It will help management abstain from over or under-investment.

Answer and Explanation: 1

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Years Cash flow Factor Present value
Y0 -200 1 -200
Y1 80 0.916 73.28
Y2 90 0.839 75.51
Y3 85 0.768 65.28
Y4 10 0.703 7.03

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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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