NPV-Mason Products

NPV-Mason Products - 4. What are the criticisms of the...

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Mason Products You are a new financial analyst with Mason Products.  You will be evaluating two potential  investments, both with five-year expected lives and identical initial outlays of$110,000.  The required rate of return on both projects is 12 percent. The expected free cash flows  from each project are as follows: Project A Project B Initial Outlay -$110,000 -$110,000 Year 1 20,000 40,000 Year 2 30,000 40,000 Year 3 40,000 40,000 Year 4 50,000 40,000 Year 5 70,000 40,000 In evaluating these projects, please respond to the following questions: 1. Why is the capital-budgeting process so important? 2. Why is it difficult to find exceptionally profitable projects? 3. What is the payback period on each project? If Mason imposes a three-year maximum  acceptable payback period, which of these projects should be accepted?
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Unformatted text preview: 4. What are the criticisms of the payback period? 5. Determine the net present value for each of these projects. Should they be accepted? 6. Describe the logic behind the net present value. 7. What would happen to the net present value for each project if the required rate of return increased? If the required rate of return decreased? 8. Determine the internal rate of return for each project. Should they be accepted? 9. How does a change in the required rate of return affect the project's internal rate of return? 10. What reinvestment rate assumptions are implicitly made by the net present value and internal rate of return methods? Which one is better?...
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