Capital budgeting is utilized to determine if a project is worthwhile. The net present value (NPV), payback period, and internal rate of return (IRR) methods are used to rank and select which project to undertake. The following video outlines the NPV and IRR method of capital budgeting: Explain how to calculate the NPV, IRR, and payback period for each project. Utilizing the capital budgeting calculations, you will need to select the best investment for the company. These calculations will be based on the following scenario: Hunter Shipyard Industries has 3 potential projects to consider, all with an initial cost of $1,250,000. The company prefers to reject any project with a 4-year cut-off period for recapturing initial cash outflow. Given the cost of capital rates and the future cash flow for each project, determine which project the company should accept.
Scenario:
Capital budgeting is utilized to determine if a project is worthwhile. The
Explain how to calculate the NPV, IRR, and payback period for each project. Utilizing the capital budgeting calculations, you will need to select the best investment for the company. These calculations will be based on the following scenario:
Hunter Shipyard Industries has 3 potential projects to consider, all with an initial cost of $1,250,000. The company prefers to reject any project with a 4-year cut-off period for recapturing initial
| Cash Flow |
Project A |
Project I |
Project U |
| Year 1 | 250,000 | 450,000 | 250,000 |
| Year 2 | 250,000 | 450,000 | 400,000 |
| Year 3 | 250,000 | 450,000 | 600,000 |
| Year 4 | 250,000 | 450,000 | 800,000 |
| Year 5 | 400,000 | 400,000 | 200,000 |
| Year 6 | 400,000 | 400,000 | 800,000 |
| Year 7 | 400,000 | 400,000 | 600,000 |
| Year 8 | 400,000 | 400,000 | 200,000 |
| Cost of Capital |
4% |
6% |
8% |
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