Capital Budgeting Project Selection Assignment

For the following two projects, determine the

• Payback Period
• Discounted Payback
• Net Present Value
• Profitability Index (Benefit-Cost Ratio)
• Internal Rate of Return
• Modified Internal Rate of Return

• Note that Project A is a Below Average risk project while Project B is of Above Average risk.
• Assume your firm is in the 40% tax bracket, and that your cost of capital is 9%.
• The firm adjusts its projects with risk adjusted discount rates to account for project risks.
• The risk schedule applied is as follows:

\begin{tabular}{|c|l|l|l|l|l|c|} \hline & Project A & & & Project B & & \\ \hline Year & & Net Income & Cash Flow & & Net Income & Cash Flow \\ \hline 0 & & & (10,000) & & & (10,000) \\ \hline 1 & & 7,000 & 9,000 & & 1,000 & 2,000 \\ \hline 2 & & 1,000 & 2,000 & & 9,000 & 10,000 \\ \hline \hline \end{tabular} \begin{tabular}{|l|l|c|} \hline \multicolumn{1}{|c|}{ Risk Class } & \multicolumn{1}{|c|}{ Description } & RADR \\ \hline Below Average & Less than Firm Average Risk & 8% \\ \hline Average & Risk equal to Firm Average Risk & 9% \\ \hline Above Average & Higher than Normal but Not Excessive Risk & 10% \\ \hline Highest Risk & Extremely High Risk & 15% \\ \hline \end{tabular}