Capital Budgeting Project Analysis
Task:
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.
Relevant information:
- The firm uses a 3-year cutoff when using the payback method.
- The hurdle rate used to evaluate capital budgeting projects is 15%.
The cash flows for projects A, B and C are provided below and attached.
Project A Project B Project C
Year 0 -30,000 -20,000 -50,000
Year 1 0 4,000 20,000
Year 2 7,000 5,000 20,000
Year 3 20,000 6,000 20,000
Year 4 20,000 7,000 5,000
Year 5 10,000 8,000 5,000
Year 6 5,000 9,000 5,000
- Assume the projects are independent and answer the following:
- Calculate the payback period for each project.
- Which project(s) would you accept based on the payback criterion?
- Calculate the internal rate of return (IRR) for each project.
- Which projects would you accept based on the IRR criterion?
- Calculate the net present value (NPV) for each project.
- Which projects would you accept based on the NPV criterion?
- Assume the projects are mutually exclusive and answer the following:
- Which project(s) would you accept based on the payback criterion?
- Which projects would you accept based on the IRR criterion?
- Which projects would you accept based on the NPV criterion?
Submission Instructions:
- Attention: Complete and submit the assignment by 10:00 PM ET Friday.
- You should submit your completed work in a Word document or Excel spreadsheet if needed.
