Capital Budgeting Analysis

OPERATING LIFE: All projects have an estimated 4 year operating life

Capital Budgeting Calculations: You will find the Cash Flow estimates for each of the four projects and the Target Rate of Return for 2017 developed by the Finance Department on the CAPITAL BUDGETING worksheet. Use this information to answer the following questions:

1. For Projects 1, 2, 3, and 4 develop the following capital budgeting calculations:

a. Net Present Value (NPV) (Do not include the dollar sign ($). Negative amounts must be indicated by a minus sign to be considered correct. Round your answer to the nearest whole dollar. (e.g., 3,216))

b. Internal Rate of Return (IRR) (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

c. Profitability Index (PI) (Round your answer to 2 decimal places. (e.g., 32.16))

d. Payback Period (Round your answer to 2 decimal places. (e.g., 32.16). If payback does not occur in 4 years enter 0.00 for NO PAYBACK)

e. Discounted Payback Period (Round your answer to 2 decimal places. (e.g., 32.16). If payback does not occur in 4 years enter 0.00 for NO PAYBACK)

2. Capital Budgeting Evaluation (Select from a drop down list question): After you have completed your calculations for NPV, IRR, PI, Payback period, and Discounted Payback period you will evaluate each project based on your findings from each of these types of capital budgeting calculations. I want you to be able to tell me if each project is either ACCEPTABLE or NOT ACCEPTABLE based on each of your capital budgeting calculations. Remember, for the payback period and discounted payback period, the CEO expects projects to payback within 4 years.

3. Acceptable Project Combinations (Select from a drop down list question): After completing the calculations for each project you must decide which combination of these four INDEPENDENT projects are acceptable for Amaron Products, Inc. based on the NPV criterion:

a) Identify all project combinations that are acceptable for Amaron Products based on the NPV acceptance criterion. (example of possible project combinations (X & Y & Z), and (X & Y), and (X & Z)

b) From the list of Acceptable Project Combinations you identified in part (a) above select the project combinations that have a combined project cost less than the restricted capital budget shown in the CAPITAL BUDGETING worksheet.

c) Which ONE of these project combinations identified in part (b) above will MAXIMIZE the corporate value of Amaron Products?

	CASH FLOWS OVER THE PROJECT'S LIFE
			Net Cash Flows At End of Year
	Year Number		0	1	2	3	4
	YEAR		2016	2017	2018	2019	2020
	CAPITAL PROJECT 1		-$2,255,000	$721,400	$801,800	$593,100	$1,136,000
	CAPITAL PROJECT 2		-$3,265,964	$926,208	$927,125	$821,196	$2,139,306
	CAPITAL PROJECT 3		-$1,743,541	$338,026	$438,825	$707,028	$1,213,703
	CAPITAL PROJECT 4		-$3,567,558	$804,269	$919,913	$1,335,775	$1,958,653
	Target Rate of Return		14.375%
	CAPITAL BUDGETING CALCULATIONS & EVALUATION
	Project Evaluations
	Calculate		Net Present Value (NPV)	Internal Rate of Return (IRR)	Profitability Index (PI)	Payback Period	Discounted Payback Period
	CAPITAL PROJECT 1			0.0%	0.000	0.00	0.00
	CAPITAL PROJECT 2		$0	0.0%	0.000	0.00	0.00
	CAPITAL PROJECT 3		$0	0.0%	0.000	0.00	0.00
	CAPITAL PROJECT 4		$0	0.0%	0.000	0.00	0.00
	a) Identify all project combinations that are acceptable for Amaron Products based on the NPV acceptance criterion.
	POSSIBLE PROJECT COMBINATIONS examples: (#5 & #7 & #8) or (#5 & #7)		Combined Project Cash Flows At End of Year
			Project Cost 2016	2017	2018	2019	2020	NET PRESENT VALUE (NPV)
	b) From the list of Acceptable Project Combinations you identified in part (a) above select the project combinations that have a combined project cost less than the Restricted Capital Budget of $5,235,700.
	POSSIBLE PROJECT COMBINATIONS examples: (#5 & #7 & #8) or (#5 & #7)		Combined Project Cash Flows At End of Year
			Project Cost 2016	2017	2018	2019	2020	NET PRESENT VALUE (NPV)
	c) Which ONE of these project combinations identified in part (b) above will MAXIMIZE the corporate value of Amaron Products?
	PROJECT COMBINATION THAT WILL MAXIMIZE THE CORPORATE OF AMARAON PRODUCTS.		Combined Project Cash Flows At End of Year
			Project Cost 2016	2017	2018	2019	2020	NET PRESENT VALUE (NPV)