FIN 6060: Financial Decision Making

Module 4 - Capital Budgeting: NPV & IRR Worksheet

Review the General Motors annual reports and use General Motors’ cost of capital for 2018 from the previous module as the basis for this
assignment. Then complete this worksheet using the directions within to guide you. Submit your completed worksheet in the “Assignment
and Grades” tab in your course menu. When you have submitted this assignment for grading, please return to Module 4 for a module wrap-up.

Capital Budgeting: NPV & IRR Worksheet

Step 1. Calculate the net present value of the Net present value of the facility
facility. Show your calculations.
Cash Flow Discount Factor Present
Value ($) (%) ($)
Present Value of Net Annual Cash Flow 6,000,000 13.59033 81,541,020

Less: Capital Investment = 100,000,000

Net Present Value (NPV) = -18,458,020

Calculated Answer: -18,458,020 dollars.

Step 2. Calculate the internal rate of return of Internal rate of return of the new facility
the new facility. Show your calculations.

Internal Rate of Return (IRR) = Capital Investment  Net Annual Cash Flow

IRR = 100,000,0006,000,000
IRR = 16.66

Using the Present Value of Ordinary Annuity Table, 16.66 under period 20 has a closest

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 FIN 6060: Financial Decision Making
Module 4 - Capital Budgeting: NPV & IRR Worksheet

factor of 2%. Therefore, IRR is 2%.

Calculated Answer: 2%

Step 3. Calculate the NPV and IRR assuming NPV and IRR
$7 million per year in net operating cash Show your calculations.
flows for 20 years.
Cash Flow Discount Factor Present
Value ($) (%) ($)
Present Value of Net Annual Cash Flow 7,000,000 13.59033 95,132,310

Less: Capital Investment = 100,000,000

Net Present Value (NPV) = -4,867,690

Internal Rate of Return (IRR) = Capital Investment  Net Annual Cash Flow

IRR = 100,000,0007,000,000

IRR = 14.8

Using the Present Value of Ordinary Annuity Table, 14.28 under period 20 has a closest
factor of 3%. Therefore, IRR is 3%.

Calculated Answer: NPV is -4,867,690 USD and IRR is 3%

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 FIN 6060: Financial Decision Making
Module 4 - Capital Budgeting: NPV & IRR Worksheet

Step 4. Make a recommendation whether Written Response:

General Motors should complete the facility Net Present Value (NPV) is a financial metric used to evaluate the profitability of an
using net present value and internal rate of investment or project (Fernando, 2023). It calculates the present value of all expected future
return. Support your recommendation with a cash flows generated by the investment, discounted back to the present using a specified
minimum of five resources, cited in APA discount rate. The resulting NPV can be positive, negative, or zero. A positive NPV
format. suggests that the investment is expected to generate more cash inflows than outflows,
indicating it could be a profitable venture (Faster Capital, 2023). Conversely, a negative
NPV suggests that the investment may not meet the required rate of return. A zero NPV
implies that the investment would yield exactly the required rate of return (Girardin, 2023).
NPV is a widely used metric in capital budgeting and financial decision-making.

Based on the calculated figures, General Motors should carefully reconsider proceeding
with the facility, as the Net Present Value (NPV) and Internal Rate of Return (IRR)
calculations indicate potential financial challenges.

For the scenario with $6 million in annual cash flows, the NPV is notably negative at -
$18,458,020, accompanied by a modest IRR of 2%. This suggests that, under this
projection, the project may not yield positive returns and may not align with General
Motors' financial objectives. In the case of $7 million in annual cash flows, the NPV
remains negative, albeit to a lesser extent, at -$4,867,690, with a slightly improved IRR of
3%. However, the negative NPV signals that the project may struggle to generate sufficient
returns to cover the initial investment.

These financial metrics alone raise concerns about the economic viability of the facility.
General Motors should carefully weigh these figures against additional factors, including
the strategic importance of the facility, potential non-financial benefits such as operational
efficiency gains, and the prevailing economic and industry conditions (Handoyo et al.,
2023).

In conclusion, while the financial metrics present challenges, a holistic evaluation,

considering both quantitative and qualitative factors, is imperative before making a final

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 FIN 6060: Financial Decision Making
Module 4 - Capital Budgeting: NPV & IRR Worksheet

decision (Munter, 2022). General Motors should thoroughly assess the project's overall
impact on the company's objectives and position within the industry to determine the most
prudent course of action.

Step 5: Provide your reference list in APA Reference List:

format.
Faster Capital. (2023, October 12). Net Present Value: The Importance of Net Present
Value in Capital Budgeting - FasterCapital. FasterCapital.
https://fastercapital.com/content/Net-Present-Value--The-Importance-of-Net-Present-
Value-in-Capital-Budgeting.html

Fernando, J. (2023, May 24). Net Present Value (NPV): What It Means and Steps to
Calculate It. Investopedia. https://www.investopedia.com/terms/n/npv.asp

Girardin, M. (2023, April 18). Internal Rate of Return: Formula and Example. Forage.
https://www.theforage.com/blog/skills/internal-rate-of-return

Handoyo, S., Suharman, H., Ghani, E. K., & Soedarsono, S. (2023, June). A business
strategy, operational efficiency, ownership structure, and manufacturing performance: The
moderating role of market uncertainty and competition intensity and its implication on open
innovation. Journal of Open Innovation: Technology, Market, and Complexity, 9(2),
100039. https://doi.org/10.1016/j.joitmc.2023.100039

Munter, P. (2022, March 9). SEC.gov | Assessing Materiality: Focusing on the Reasonable
Investor When Evaluating Errors. https://www.sec.gov/news/statement/munter-statement-
assessing-materiality-030922

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