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Capital Budgeting Questions Please work on these problems and submit them. 1. Primus Corp. is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the next eight years. The company uses a discount rate of 12 percent. What is the payback period? 3.8 years  What is the NPV for the project? $2,189,324.56  What is the IRR for the project? 20.33%  2. Skywards Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next five years. Annual depreciation expense was $650,000. The company’s cost of capital is 15 percent.  Compute the discounted payback for this project? - The discounted payback period is between 4 and 5 years since the cumulative discounted cash flow crosses the initial investment of $3.25 million between these periods.  Compute the NPV for this project - NPV = Sum of [CFt / (1 + r)^t] - Initial Investment NPV = [$1,400,000 / (1 + 0.15)^1] + [$750,000 / (1 + 0.15)^2] + [$750,000 / (1 + 0.15)^3] + [$750,000 / (1 + 0.15)^4] + [$750,000 / (1 + 0.15)^5] - $3,250,000 NPV ≈ $1,217,391.30 + $652,173.91 + $568,181.82 + $493,902.44 + $429,042.36 - $3,250,000 NPV ≈ $1,111,692.83  Compute the IRR for this project - 26.68%. 3. You are considering a project that has an initial outlay of $1million. The profitability index of the project is 2.24. What is the NPV of the project? - Net present value of the project $1,240,000. 4. Identify the weaknesses of the payback period method.

-The time value of money is not considered and the cash flows after the investment is recovered are not considered. 5. Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project? 6. - Net present value of the project is = $208,314.62

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