Tutorial– Capital Budgeting

1) An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400,
and a discount rate of 14 percent. What is the discounted payback period for these cash
flows if the initial cost is $7,000?

2) The Bolly Company is considering two mutually exclusive projects:

Year Project A Project B
0 -$100,000 -$100,000
1 31,250 0
2 31,250 0
3 31,250 0
4 31,250 0
5 31,250 200,000
The required rate of return on these projects is 12%.
a) ------ What is each project's regular payback period?
b) What is each project’s discounted payback period?
c) What is each project's net present value?
d) What is each project’s IRR?
e) Which project do you prefer, and why?

3) Your division is considering two projects. Its WACC is 10%, and the projects' after-
tax cash flows (in millions of dollars) would be as follows:

Expected net
cash flows
Project Project
Time A B
0 ($30) ($30)
1 $5 $20
2 $10 $10
3 $15 $8
4 $20 $6

a) Calculate the projects' NPVs and IRRs,.

b) If the two projects are independent, which project(s) should be chosen?
c) If the two projects are mutually exclusive and the WACC is 10%, which project(s)
should be chosen?