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    Capital Budgeting

    Uploaded by

    Zarmina Zaid
    This document provides 9 questions related to capital budgeting techniques including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The questions involve calculating and comparing these metrics for various investment projects to determine which projects should be accepted based on criteria like maximum payback periods or a company's cost of capital.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Capital Budgeting

    Uploaded by

    Zarmina Zaid
    49 views2 pages
    This document provides 9 questions related to capital budgeting techniques including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The questions involve calculating and comparing these metrics for various investment projects to determine which projects should be accepted based on criteria like maximum payback periods or a company's cost of capital.

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    This document provides 9 questions related to capital budgeting techniques including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The questions involve calculating and comparing these metrics for various investment projects to determine which projects should be accepted based on criteria like maximum payback periods or a company's cost of capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    49 views2 pages

    Capital Budgeting

    Uploaded by

    Zarmina Zaid
    This document provides 9 questions related to capital budgeting techniques including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The questions involve calculating and comparing these metrics for various investment projects to determine which projects should be accepted based on criteria like maximum payback periods or a company's cost of capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    CAPITAL BUDGETING TECHNIQUES

    Q # 1 Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two
    mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an
    initial outlay of $35,000. Using the expected cash inflows given for each project in the following table, calculate
    each project’s payback period. Which project meets Elysian’s standards?
    Expected cash inflows
    Year Hydrogen Helium
    1 $6,000 $7,000
    2 6,000 7,000
    3 8,000 8,000
    4 4,000 5,000
    5 3,500 5,000
    6 2,000 4,000

    Q # 2 Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of
    a new machine and must choose between two alternative ones. The first machine requires an initial investment
    of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second
    machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for
    20 years.
    a. Determine the payback period for each machine.
    b. Comment on the acceptability of the machines, assuming that they are independent projects.

    Q # 3 An initial investment of $130,000 is expected to generate annual cash inflow of $32,000 for 6 years.
    Depreciation is allowed on the straight line basis. It is estimated that the project will generate scrap value of
    $10,500 at end of the 6th year. Calculate its accounting rate of return assuming that there are no other expenses
    on the project.
    Q # 4 Dane Cosmetics is evaluating a new fragrancemixing machine. The machine requires an initial investment of $24,000
    and will generate after-tax cash inflows of $5,000 per year for 8 years. For each of the costs of capital listed, (1) calculate the net
    present value (NPV), (2) indicate whether to accept or reject the machine, and (3) explain your decision.
    a. The cost of capital is 10%.
    b. The cost of capital is 12%.
    c. The cost of capital is 14%
    Q # 5 Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are
    under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is
    15%.

    a. Calculate the net present value (NPV) of each press.


    b. Using NPV, evaluate the acceptability of each press.
    c. Rank the presses from best to worst using NPV.
    d. Calculate the profitability index (PI) for each press.
    e. Rank the presses from best to worst using PI.
    Q # 6 Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm’s
    warehouse capacity. The relevant cash flows for the projects are shown in the following table. The firm’s cost of capital is 15%.

    a. Calculate the IRR to the nearest whole percent for each of the projects.
    b. Assess the acceptability of each project on the basis of the IRRs found in part a.
    c. Which project, on this basis, is preferred?
    Q # 7 For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each
    project, the maximum cost of capital that the firm could have and still find the IRR acceptable.

    Q # 8 Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of
    $150,000. The company’s board of directors has set a maximum 4-year payback requirement and has set its cost of capital at
    9%. The cash inflows associated with the two projects are shown in the following table.

    Cash inflows (CFt)


    Year Project A Project B
    1 $45,000 $75,000
    2 45,000 60,000
    3 45,000 30,000
    4 45,000 30,000
    5 45,000 30,000
    6 45,000 30,000

    a. Calculate the payback period for each project.


    b. Calculate the NPV of each project at 0%.
    c. Calculate the NPV of each project at 9%.
    d. Derive the IRR of each project.
    e. Rank the projects by each of the techniques used. Make and justify a recommendation.

    Q # 9 Projects A and B, of equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%.
    The cash flows for each project are shown in the following table.
    a. Calculate each project’s payback period.
    b. Calculate the net present value (NPV) for each project.
    c. Calculate the internal rate of return (IRR) for each project.
    d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may
    exist between NPV and IRR.
    e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

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