| Course | BUS 550 Business Finance |
|---|---|
| Module | Module 6 |
| Paper type | Capital budgeting analysis |
| Length | About 1,033 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 550 Module 6
A Washing Line for Used Bottles: Net Present Value, IRR and Payback for a Recycler's $3.2 Million Investment
Student Name
MBA Program, Aspen University
BUS 550: Business Finance
Instructor Name
Month Day, Year
A Washing Line for Used Bottles: Net Present Value, IRR and Payback for a Recycler's $3.2 Million Investment
Peach State Polymer Recovery, a composite company near Atlanta, Georgia, buys baled plastic bottles collected by municipal recycling programs, sorts and shreds them, and sells the flakes to manufacturers of carpet and strapping. Beverage companies have committed to using more recycled plastic in their bottles, but they need food-grade pellets, which require washing, decontamination and pelletizing equipment that Peach State lacks. The company is considering a $3.2 million line to produce them. This paper evaluates the investment using standard capital budgeting methods.
The Project's Cash Flows
Capital budgeting evaluates the incremental cash flows a project creates: the additional after-tax cash that flows in or out because the project is undertaken (Brigham & Ehrhardt, 2020). Peach State's finance team estimated those flows, in thousands of dollars, from expected pellet sales to two bottlers, the price premium for food-grade pellets over flakes, added labor and energy, taxes and depreciation's tax shield.
The initial outlay includes the equipment, installation and $200,000 of added working capital for inventory and receivables. The final year includes recovery of that working capital and the line's expected resale value. Cash flows rise in the early years as volume ramps up and decline slightly at the end as maintenance rises.
| Year | After-tax cash flow, thousands | Cumulative, thousands |
|---|---|---|
| 0 | minus 3,200 | minus 3,200 |
| 1 | 720 | minus 2,480 |
| 2 | 860 | minus 1,620 |
| 3 | 940 | minus 680 |
| 4 | 960 | 280 |
| 5 | 960 | 1,240 |
| 6 | 900 | 2,140 |
| 7 | 860 | 3,000 |
Net Present Value
The company's cost of capital, the return its investors require on projects of average risk, is 10%. Bringing each year's flow back to today at 10% and netting out the $3.2 million spent leaves about $1.07 million. The project is expected to add about $1.07 million to the value of the company beyond what investors require, so it passes the most important test.
Internal Rate of Return
Pushed upward until the added value vanishes, the discount rate reaches about 19.2%, the project's internal rate of return, nearly twice the 10% cost of capital. The project would remain acceptable even if the cost of capital were considerably higher; at 14%, net present value would still be about $550,000.
Payback and Profitability Index
Payback asks a blunter question: in what year does the money come back? The table shows cumulative flows turning positive during the fourth year: after three years, $680,000 remains to be recovered, and the fourth year brings in $960,000, so payback occurs about 0.7 of the way through year four, at roughly 3.7 years. Dividing the discounted inflows by the $3.2 million outlay gives a profitability index of about 1.34: each dollar invested returns $1.34 in present value.
How Companies Use These Methods
Graham and Harvey (2001) surveyed 392 chief financial officers about their capital budgeting practices. Roughly three in four said discounted value and the break-even rate were tools they relied on routinely, and more than half also used payback, which was especially popular among smaller firms and those whose CEOs lacked an MBA. Many firms combine methods, using net present value for value, internal rate of return as an intuitive rate and payback as a check on liquidity and risk. Peach State's board, which worries about tying up cash, has asked for all three.
Using Net Present Value Wisely
Ross (1995) defended net present value as the correct rule for creating value but warned that it is often misapplied: firms may use a single discount rate for projects of very different risk, ignore the value of options to delay, expand or abandon, or treat optimistic forecasts as certain. For this project, the risk resembles the company's existing business in some ways but depends on two bottlers' contracts, so the board should examine whether a higher discount rate is warranted; even at 14%, the project adds value. The option to add a second line later, if demand grows, adds value not captured in the calculation.
Testing the Key Assumptions
The cash flows rest on three assumptions the board should test. The first is the price premium for food-grade pellets over flake; if it fell by a third, net present value would drop to roughly $300,000, still positive but thin. The second is the volume the two bottlers will take; at 70% of the forecast in every year, the project would roughly break even. The third is the cost of bales, which rises when municipal collection falls. A simple sensitivity table on each of these, shared with the board, would show which assumptions matter most and where contract terms should provide protection.
When Methods Disagree
For a single project like this one, all four methods agree. Disagreements arise when comparing mutually exclusive projects of different size or timing; a smaller project may have a higher internal rate of return but a lower net present value. In such cases, net present value should decide, because it measures the dollars of value added at the company's cost of capital.
Strategic Fit
The project also changes Peach State's position. Flake sold to carpet makers is a commodity whose price follows virgin resin; food-grade pellets sold under multi-year contracts to beverage companies are a more specialized product with fewer suppliers. Moving up that chain could reduce the company's exposure to commodity swings, a benefit the cash flow table does not show but the board should weigh.
Recommendation
Peach State should approve the $3.2 million line. It adds about $1.07 million in value, returns nearly twice the cost of capital and pays back in under four years. Approval should be conditioned on signed supply agreements with both bottlers covering at least 60% of the line's capacity for three years, since the cash flows depend on those customers.
Conclusion
Every method used in practice supports the investment. Net present value shows it adds value, the internal rate of return shows a wide margin over the cost of capital, payback reassures a cash-conscious board, and the profitability index shows strong value per dollar invested. Research on how firms use these tools, and on how net present value can be misapplied, points the board to the contracts that make the forecasts real.
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
Ross, S. A. (1995). Uses, abuses, and alternatives to the net-present-value rule. Financial Management, 24(3), 96-102. https://doi.org/10.2307/3665561
Reading the BUS 550 Module 6 assignment instructions
Aspen's catalog lists capital budgeting processes and techniques among the subjects of BUS 550, and this module usually asks students to evaluate an investment with several methods and recommend a decision. Your classroom has the exact Module 6 directions; this example evaluates one project. Describe the project and its strategic purpose. Lay out the incremental after-tax cash flows by year, stating key assumptions. Choose a discount rate and explain it. Work out the value added in today's dollars, the rate at which that value falls to zero, the time to recover the outlay and, where helpful, value per dollar invested, leaving enough working on the page for a reader to retrace it. Explain what each method measures and its limits. Use research on practice. Make a recommendation and explain the decision rule if methods point different ways.
Inside the BUS 550 Module 6 example
The paper opens with Peach State Polymer Recovery's plan to sell food-grade recycled pellets to beverage bottlers. A cash flow table lists the $3.2 million investment and annual after-tax cash flows over seven years, including working capital recovery and the line's resale value in the final year. Discounted at 10%, the flows leave roughly $1.07 million of value after repaying the outlay, and the break-even discount rate lands near 19.2%. Cumulative cash flows turn positive during the fourth year, a payback of about 3.7 years, and the profitability index is about 1.34. A 2001 survey of 392 finance chiefs by Graham and Harvey shows these two discounting methods dominate practice at large firms. Ross's Financial Management essay warns against applying net present value mechanically. The conclusion recommends approval with a check on the bottlers' contracts.
BUS 550 Module 6 rubric: what earns full marks
Capital budgeting papers in an MBA finance course are graded on correct cash flows, accurate calculations, sound interpretation of each method and a decision rule that favors value. This example lists every year's cash flow in a table and states the discount rate's basis, so the grader can reproduce the net present value and the cumulative payback. Each method is explained in terms of what it tells a manager, not just how it is computed. A field survey of corporate finance chiefs shows the student knows how practice compares with theory, and Ross's Financial Management article supports a thoughtful use of net present value rather than a mechanical one. The standard formulas come from the Brigham and Ehrhardt text, and the recommendation names what could make the project fail, which shows that approval rests on judgment as well as arithmetic.
BUS 550 Module 6 help from the desk
The most frequent mistakes in Module 6 are including financing costs, such as interest, in project cash flows, and ignoring working capital and salvage value. Use incremental after-tax operating cash flows and let the discount rate account for financing. Show each year's cash flow in a table. Explain what each method measures: net present value adds value in dollars, internal rate of return gives a rate, payback measures speed of recovery and the profitability index relates value to cost. Recognize that payback ignores cash flows after the cutoff and the time value of money. When methods disagree, especially between mutually exclusive projects, follow net present value. Finally, connect the numbers to risks, such as whether customers will buy the output, since a positive net present value depends on its assumptions.
Write yours, or have the desk draft it
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BUS 550 Module 6 questions, answered
What does BUS 550 Module 6 usually ask for?
Aspen's BUS 550 covers capital budgeting techniques in this module, so evaluating an investment with methods such as net present value, internal rate of return and payback is typical. Follow your classroom prompt.
What is net present value?
The present value of a project's future cash flows minus its initial cost; a positive figure means the project is expected to add value at the chosen discount rate.
What is the internal rate of return?
The discount rate at which a project's net present value equals zero; a project is attractive when its internal rate of return exceeds the cost of capital.
Where can I find a free BUS 550 Module 6 sample paper?
The complete analysis is shown above: a recycler's $3.2 million line judged four ways from a year-by-year cash flow table.
Which method should decide when they disagree?
Go with the dollar measure of value added, since it reflects the firm's cost of capital and copes properly with projects of different size and timing.