University Finance: AREC 408 Capital Budgeting Homework Assignment

This finance assignment focuses on capital budgeting, covering key concepts like Net Present Value (NPV), Internal Rate of Return (IRR), and payback period analysis. The solution presents calculations for two projects, A and B, evaluating their financial viability based on annual cash flows, depreciation, income tax, and interest. The assignment also explores the difference between APR and IRR, contractual rates, and effective interest rates. Additional sections include an amortization schedule, effective rate calculations, and an analysis of inflation's impact on investment decisions. The document concludes with a final project analysis and investment recommendations based on the provided data. The document utilizes financial formulas and calculations to determine the best investment options for the farmer. The assignment is from the AREC 408 Agricultural Finance course.

Capital Budgeting
A

FINANCE 1
Part 1
A.
NPV, IRR and Simple Rate of Return
Project A
4%
Years 0 1 2 3 4
Initial Investment -180000
Annual cash flows 53000 53000 53000 53000
Net cash flows -180000 53000 53000 53000 53000
DCF 1.00 0.96 0.92 0.89 0.85
Present Value of Cash
Flows -180000
50961.5
4
49001.4
8
47116.8
1
45304.6
2
Simple Rate of Return -0.29 -0.29 -0.29 -0.29
Average 29%
NPV 192384.45
IRR 3%
Project B
4%
Years 0 1 2 3 4
Initial Investment -180000

FINANCE 2
Annual cash flows 40000 50000 60000 70000
Net cash flows -180000 40000 50000 60000 70000
DCF 1.00 0.96 0.92 0.89 0.85
Present Value of Cash
Flows -180000
38461.5
4
46227.8
1
53339.7
8
59836.2
9
Simple Rate of Return -0.22 -0.28 -0.33 -0.39
Average 31%
NPV 197865.42
IRR 4%
Payback Period
Project A
Years
Net Cash
Flows CF
0 -180000
-
180000
1 53000
-
127000
2 53000 -74000
3 53000 -21000
4 53000 32000
32000

FINANCE 3
Payback
Period 3.60
Project B
Years
Net Cash
Flows CF
0 -180000
-
180000
1 40000
-
140000
2 50000 -90000
3 60000 -30000
4 70000 40000
40000
Payback
Period 3.57
B.
Project A
4%
Years 0 1 2 3 4

FINANCE 4
Intial Investment -90000
Annual cash flows 53000 53000 53000 53000
Depreciation 30000 30000 15000
Income tax 15900 15900 15900 15900
Interest 4500 3420 3463.2 3461.47
Net cash flows -90000 2600 3680 18636.8 33638.5
PV 1.00 0.96 0.92 0.89 0.85
Present Value of Cash
Flows -90000 2500.00
3402.3
7
16568.0
5
28754.3
6
NPV 51224.77
IRR 15%
Project B
4%
Years 0 1 2 3 4
Intial Investment -90000
Annual cash flows 40000 50000 60000 70000
Depreciation 30000 30000 15000
Income tax 12000 15000 18000 21000
Interest 4500 3420 3463.2 3461.47
Net cash flows -90000 -6500 1580 23536.8 45538.5
PV 1.00 0.96 0.92 0.89 0.85
Present Value of Cash
Flows -90000
-
6250.00
1460.8
0
20924.1
3
38926.5
3
NPV 55061.45
IRR 12%
C. It is observed that the company has to invest in project A as in Project B, it can suffer with the
heavy loss in the first year. Project A is beneficial for the company in terms of profitability and
return to shareholders (Marchioni, and Magni, 2018).
Part 2
1.

FINANCE 5
APR and IRR are similar in terms of rate but these concepts are different. APR is the total
interest rate that an individual has to pay with the initial amount when the loan has been taken
according to the years. IRR is the interest rate that can be pay on the regular basis with the
installment payments.
2.
Contractual Rate: Contractual Rate is the specific rate which is included in the terms of note
payable or bond payable (Accounting Tools, 2018).
Annual Percentage Rate: It is the annual rate which is charged for borrowing and also earned
from an investment (The Balance, 2020).
Actuarial Interest Rate: This rate is used to evaluate the reserves required to pay out all
pension.
Effective Interest Rate: This interest rate is actually earned or paid on an investment, borrowing
and the other financial investment due to the compounding period (CFI, 2019).
3.
Given
Loan 21000
Years 10
EMI 2461.9
APR 6%
4.

FINANCE 6
Amortization Schedule
Payment Number Payment
Beginning
Principal Principal Interest Balance
1 $5,405.23 $15,000.00
$4,805.2
3 $600.00
$10,194.7
7
2 $5,405.23 $10,194.77
$4,997.4
4 $407.79 $5,197.33
3 $5,405.23 $5,197.33
$5,197.3
3 $207.89 $0.00
5.
Given
APR 6%
Loan A Payment 2
Loan B Payment 12
Effective Rate (1+r/m)n-1
Loan A 6%
Loan B 6%
6.
Given
Inflation Rate 3%
Interest Rate 6%
PV of annual payments 6000
Years 6

FINANCE 7
6%
0 1 2 3 4 5 6
Annual payment 6000 6360 6360 6360 6360 6360 6360
PV of annual
payments
0.000
0
-
6360.0
0
-
12720.0
0
-
19080.0
0
-
25440.0
0
-
31800.0
0
-
38160.0
0
7.
Project
8%
Years 0 1 2 3 4 5
Initial Investment 163000
Annual cash flows 50880 53932.8
57168.7
7 60598.89 64234.83
Net cash flows 163000 50880 53932.8
57168.7
7 60598.89 64234.83
PV 1.00 0.93 0.86 0.79 0.74 0.68
Present Value of Cash
Flows 163000 50880.00 53932.80
57168.7
7 60598.89 64234.83
NPV 286815.2898

FINANCE 8
C. It is observed that the farmer can invest 163000 and get the profit 286815.2. As per the NPV
of the company, it can be said that the company gets the high amount of return from its
investment that’s why; it is concluded that the company has to invest on this project.