Capital Budgeting A company is considering four capital budgeting projects. Data relative to each is given...

Transcribed Image Text:

Capital Budgeting A company is considering four capital budgeting projects. Data relative to each is given below. Project A has a life of 8 years & B has a life of 7 years. Project C has a 6 year life & D has a life of 6 years. The company uses the Net Present Value (NPV) method to evaluate capital budgeting projects and its discount rate is 5.75%. Initial cash outlay Project A -$2,500,000 Project B -$2,000,000 Project C -$3,200,000 Project D -$11,200,000 (cost) Cash inflows per year $390,000 305,000 Residual value $120,000 $0 $675,000 $50,000 $1,675,000 $1,000,000 (Calculating the Projects NPV is worth 40pts) 1. If the projects are mutually exclusive, which, if any, should the company accept? Why? 10pts 2. If the projects are independent, which, if any, should the company accept? Why? 10pts 3. One of the company's managers states To me, no matter what else we do, Project D needs to be our first choice because it has the highest cashflows per year." Comment on this manager's proposal, considering the concepts of NPV and Payback Method. 10pts 4. Calculate the payback period for each project (20pts). Can you accept any projects just based on the backpack period? Which ones and why? 10pts Capital Budgeting A company is considering four capital budgeting projects. Data relative to each is given below. Project A has a life of 8 years & B has a life of 7 years. Project C has a 6 year life & D has a life of 6 years. The company uses the Net Present Value (NPV) method to evaluate capital budgeting projects and its discount rate is 5.75%. Initial cash outlay Project A -$2,500,000 Project B -$2,000,000 Project C -$3,200,000 Project D -$11,200,000 (cost) Cash inflows per year $390,000 305,000 Residual value $120,000 $0 $675,000 $50,000 $1,675,000 $1,000,000 (Calculating the Projects NPV is worth 40pts) 1. If the projects are mutually exclusive, which, if any, should the company accept? Why? 10pts 2. If the projects are independent, which, if any, should the company accept? Why? 10pts 3. One of the company's managers states To me, no matter what else we do, Project D needs to be our first choice because it has the highest cashflows per year." Comment on this manager's proposal, considering the concepts of NPV and Payback Method. 10pts 4. Calculate the payback period for each project (20pts). Can you accept any projects just based on the backpack period? Which ones and why? 10pts

Answer rating: 100% (QA)

Lets start by calculating the NPV for each project using the given discount rate of 575 Then well proceed to answer each question 1 Mutually Exclusive ... View the full answer