CASE-11M Student Version 04/08/23

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 costand savings data, then calculates the above decision criteria. Notethat this model was constructed specifically for this case, and henceproject life and depreciation allowances are fixed. The spreadsheet sheet NPV-PROF contains a graph of the NPV profiles and the sheet MULTIPLE contains a graph of the multiple IRR project.If you are using the student version of the model, the following cellshave been blanked out: C40:C41,B58:C65, D57:D65, B67:B72, and F70:F72.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 0.00

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 $0 Total

--------Proceeds from old equip $0 Depreciation information:Tax on proceeds 0 Removal cost (AT) 0 Depreciable basis:

--------Net cash flow, old $0

--------Net invest. outlay $0

======== Annual cash flows:

Deprn A.T. Cost

Year Tax saving Saving Net CF Cum CF ---- -------- ------------ ------ ------

0 $0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0

NPV: Analysis of Short-Term Project:IRR: Cost ($120,000)TV: Year 1 CF $150,000

MIRR: NPVPayback: IRR

PI: MIRR

Data Table for effect of cost savings:

Savings NPV IRR MIRR Payback PI0 0 0 0 0

40,000 (24,798) 7.2% 9.3% 5.43 0.88 50,000 6,078 11.9% 11.4% 4.56 1.03 60,000 36,955 16.2% 13.2% 3.96 1.17 70,000 67,832 20.2% 14.9% 3.50 1.32 80,000 98,709 24.1% 16.4% 3.14 1.46

Data Table for effect of cost of capital:------->

Cap Cost NPV IRR MIRR Payback PI0 0 0 0 0

8.0% 63,334 16.2% 11.6% 3.96 1.30 9.0% 54,058 16.2% 12.1% 3.96 1.25

10.0% 45,276 16.2% 12.7% 3.96 1.21 11.0% 36,955 16.2% 13.2% 3.96 1.17 12.0% 29,064 16.2% 13.8% 3.96 1.14 13.0% 21,575 16.2% 14.4% 3.96 1.10 14.0% 14,460 16.2% 14.9% 3.96 1.07 15.0% 7,698 16.2% 15.5% 3.96 1.04 16.0% 1,263 16.2% 16.1% 3.96 1.01 17.0% (4,863) 16.2% 16.7% 3.96 0.98 18.0% (10,700) 16.2% 17.2% 3.96 0.95

Data Table for effect of tax rates:

Tax rate NPV IRR MIRR Payback PI0 0 0 0 0

20.0% 66,611 19.7% 14.8% 3.72 1.31 30.0% 51,783 18.0% 14.1% 3.83 1.24 40.0% 36,955 16.2% 13.2% 3.96 1.17 50.0% 22,127 14.3% 12.4% 4.10 1.10 60.0% 7,299 12.1% 11.5% 4.28 1.03

Analysis of the Multiple IRR Project:

Cap cost NPV CF### 0 (30,000)

-10% -11481.5 1 150,000 0% 0.0 2 (120,000)

10% 7190.1 20% 11666.7 NPV = $7,740 30% 14378.7 IRR(1) = 0.0%40% 15918.4 IRR(2) = 300.0%50% 16666.7 60% 16875.0 Note: When multiple IRRs exist, the spread-70% 16712.8 sheet reports the one closest to the80% 16296.3 initial guess. Therefore, we90% 15706.4 guessed 10% and 300% to obtain

100% 15000.0 the two IRRs.110% 14217.7 120% 13388.4 130% 12533.1 140% 11666.7 150% 10800.0 160% 9940.8 170% 9094.7 180% 8265.3 190% 7455.4 200% 6666.7 210% 5900.1 220% 5156.3 230% 4435.3 240% 3737.0 250% 3061.2 260% 2407.4 270% 1775.0 280% 1163.4 290% 572.0 300% 0.0 310% -553.2 320% -1088.4 330% -1606.3

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==============

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End-of-project cash flows:$0

0 ----------

$0

Depreciation information:

$0

NPV ofshort-term project

0 18,889 17,615 16,364 15,135 13,929 12,743 11,579 10,435

9,310 8,205 7,119

==============END

0.08 0.09 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17 0.18-20000

20000

60000

FIGURE 1NPV-PROFILES

NPV(LARGE) NPV(SMALL)

COST OF CAPITAL

NP

V

0.08 0.09 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17 0.18-20000

20000

60000

FIGURE 1NPV-PROFILES

NPV(LARGE) NPV(SMALL)

COST OF CAPITAL

NP

V

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3-5000

5000

15000

FIGURE 2Multiple IRR Illustration

NPV

Cost of Capital

NP

V

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3-5000

5000

15000

FIGURE 2Multiple IRR Illustration

NPV

Cost of Capital

NP

V