Calculating Incremental Cash Flows

27. Calculating Incremental Cash Flows Darin Clay, the CFO of MakeMoney.com, has to decide
between the following two projects:
YearProject MillionProject Billion
0 −$1,200 −$Io
1 Io
 + 160 Io
 + 400
2 960 1,200
3 1,200 1,600
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The expected rate of return for either of the two projects is 12 percent. What is the range of initial
investment (Io) for which Project Billion is more financially attractive than Project Million?
28. Problems with IRR McKeekin Corp. has a project with the following cash flows:
YearCash Flow
0 $20,000
1 −26,000
2 13,000
What is the IRR of the project? What is happening here?
Excel Master It! Problem
As you have already seen, Excel does not have a function to calculate the payback period. We have shown three ways to calculate the payback period, but there are numerous other methods as well. The cash flows for a project are shown below. You need to calculate the payback period using two different methods:
1. Calculate the payback period in a table. The first three columns of the table will be the year, the cash flow for that year, and the cumulative cash flow. The fourth column will show the whole year for the payback. In other words, if the payback period is 3 plus years, this column will have a 3, otherwise it will be a zero. The next column will calculate the fractional part of the payback period, or else it will display zero. The last column will add the previous two columns and display the final payback period calculation. You should also have a cell that displays the final payback period by itself, and a cell that returns the correct accept or reject decision based on the payback criteria.
2. Write a nested IF statement that calculates the payback period using only the project cash flow column.
The IF statement should return a value of “Never” if the project has no payback period. In contrast to
the example we showed previously, the nested IF function should test for the payback period starting
with shorter payback periods and working towards longer payback periods. Another cell should display the correct accept or reject decision based on the payback criteria.
Year Cash Flow
0 −$250,000
1 41,000
2 48,000
3 63,000
4 79,000
5 88,000
6 64,000
7 41,000

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