Answered: The payback period for each project The…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 21P

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Question

The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted.

	Project A	Project B	Project C
Initial Cost	$230,000	$250,000	$190,000
Expected life	5years	5 years	4 years
Scrap value expected	$10,000	$15,000	$10,000
Expected Cash Inflows:	$	$	$
End Year 1	85,000	95,000	45,000
End Year 2	70,000	70,000	65,000
End Year 3	65,000	55,000	95,000
End Year 4	60,000	50,000	100,000
End Year 5	50,000	50,000

The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%.

Periods	14%	18%	22%
1	0.877	0.847	0.820
2	0.769	0.718	0.672
3	0.675	0.609	0.551
4	0.592	0.516	0.451
5	0.519	0.437	0.370
6	0.456	0.370	0.303

Required:

Calculate:

The payback period for each project
The accounting rate of return for each project
The net present value for each project
The internal rate of return
Which project should be accepted – give reasons.
Explain the factors that management would need to consider in addition to the financial factors before making a final decision on a project.

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