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Topic: Capital Budgeting

Question:

Comparing Investment Criteria: Consider the following two mutually exclusive projects:

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Year 0 1 2 3 4

Cash Flow (A) -$262,782 27,300 51,000 51,000 393,000

Cash Flow (B) -$27,554 10,410 11,010 10,196 10,971

Whichever project you choose, if any, you require a 15 percent return on your investment. Required: (a) The payback period for Projects A and B is (Round your answers to 2 decimal places, e.g.32.16.) (b) The discounted payback period for Projects A and B is respectively. (Round your answers to 2 decimal places, e.g.32.16.) (c) The NPV for Projects A and B is $ and $ , respectively. and years, and years, respectively.

(Round your answers to 2 decimal places, e.g.32.16.) (d) The IRR for Projects A and B is percent and percent, respectively.

(Do not include the percent sign (%). Round your answers to 2 decimal places, e.g.32.16.) (e) The profitability index for Projects A and B is (Round your answers to 3 decimal places, e.g.32.161.) (f) Based on your answers in (a) through (e), you will finally choose Project (Click for List) and , respectively.

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*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the same in lieu of your academic submissions for grades.

Sub: Accounts

Topic: Capital Budgeting

Solution:

Year Cash Flow(A) 0 ($262,782) $ 27,300 $ 51,000 $ 51,000 $ 393,000

Cum. Cash Flows(A) ($262,782) $ (235,482) $ (184,482) $ (133,482) $ 259,518

Cash Flow(B) ($27,554) $ 10,410 $ 11,010 $ 10,196 $ 10,971

Cum. Cash Flows(B) ($27,554) $ (17,144) $ (6,134) $ 4,062 $ 15,033

1

2

3

4

Payback period 3.34 2.60 PV of Net Cum. Net Cash Cash Flow Flows(B)

Year

Cash Flow(A) Rate =

PV of Net Cash Flow 15% (262,782.00)

Cum. Net Cash Flows(A)

Cash Flow(B)

0

($262,782) $ 27,300 $

(262,782.00)

($27,554) $ 10,410 $

($27,554) ($27,554)

1 2

27,300.00 51,000.00

(235,482.00) (184,482.00)

$ 10,410 ($17,144) $ 11,010 ($6,134)

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*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the same in lieu of your academic submissions for grades.

Sub: Accounts

Topic: Capital Budgeting

51,000 $ 51,000 $ 393,000

11,010 $ 10,196 $ 10,971

3

51,000.00

(133,482.00)

$ 10,196

$4,062

4

393,000.00

259,518.00

$ 10,971

$15,033

Discount Payback Period

3.74 Rate Year 0 Cash Flow(A) ($262,782) $ 27,300 $ 51,000 $ 51,000 $ 393,000 $57,752.81 Cash Flow(A) ($262,782) $ 15% Cash Flow(B) ($27,554) $ 10,410 $ 11,010 $ 10,196 $ 10,971 $2,800.06 Cash Flow(B) ($27,554) $

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3.55

1

2

3

4 NPV Year 0 1

*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the same in lieu of your academic submissions for grades.

Sub: Accounts

Topic: Capital Budgeting

27,300 $ 51,000 $ 51,000 $ 393,000 21.91% $320,534.81 $262,782 1.22

10,410 $ 11,010 $ 10,196 $ 10,971 19.92% $30,354.06 $27,554 1.10

2

3

4 IRR

PV of Future Cash flows Initial Investment Profitability Index

** End of the Solution **

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