CapitalBudgeting - FIN 3403 Capital Budgeting Techniques 1...

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FIN 3403 Capital Budgeting Techniques 1. Suppose your firm is trying to choose between the two mutually exclusive projects below: Year Project X Cash Flows Project Y Cash Flows 0 -$45,000 -$10,000 1 20,000 5,000 2 20,000 5,000 3 20,000 5,000 a) If the required return is 12 percent and you apply the profitability index decision rule, which project should your firm accept? b) If you apply the NPV decision rule, which project should you take? c) Are your answers to (a) and (b) the same? If not, explain why they are different. 2. Consider the following cash flows: Year Cash Flows 0 -$14,000 1 7,000 2 -1,500 3 9,800 4 -2,000 5 8,500 a) Compute the IRR of this project. If the company requires a 10% rate of return on its capital investment projects, should this project be accepted? Should you use IRR to make your decision? b) Is this project is acceptable? What method should you use?
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3. The following project requires construction expenses through year 2, followed by cash inflows from year 3 through 8. If the required rate of return is 13%, is the project acceptable?
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CapitalBudgeting - FIN 3403 Capital Budgeting Techniques 1...

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