Capital Budgeting Decisions Accounting practice: Your company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years. Time 0 1 2 3 4 5 6 Cash Flow $(10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 Questions Evaluate the project using each of the following methods. For each method, should the project be accepted or rejected? Justify your answer based on the method used to evaluate the project’s cash flows. Payback period Internal Rate of Return (IRR) Simple Rate of Return Net Present Value
Capital Budgeting Decisions Accounting practice:
Your company is considering undertaking a project to expand an existing product line. The required
|
Time |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
|
Cash Flow |
$(10,000) |
$2,400 |
$4,800 |
$3,200 |
$3,200 |
$2,800 |
$2,400 |
Questions
Evaluate the project using each of the following methods. For each method, should the project be accepted or rejected? Justify your answer based on the method used to evaluate the project’s cash flows.
- Payback period
Internal Rate of Return (IRR)- Simple Rate of Return
Net Present Value
Capital Budgeting Decisions: Investment and financial commitment are two aspects of a capital budgeting choice. With each project, the firm not only invests in its long-term strategy but also creates a financial commitment that will likely have an impact on future initiatives that the company considers taking on.
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