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

	Project A			Project B
Year		Net Income	Cash Flow		Net Income	Cash Flow
0			(10,000)			(10,000)
1		7,000	9,000		1,000	2,000
2		3,000	2,000		9,000	10,000

• Note that Project A is a Below Average riskproject 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:

Risk Class	Description	RADR
Below Average	Less than Firm Average Risk	8%
Average	Risk equal to Firm Average Risk	9%
Above Average	Higher than Normal but Not Excessive Risk	10%
Highest Risk	Extremely High Risk	15%