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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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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 Spring '10
 Goldwater,Canada,Judd,Byrd,Theniel
 Net Present Value, Neagle Corporation

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