Capital Budgeting Project Selection

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 Highest risk project while Project B is of Average risk.

? Assume your firm is in the 40% tax bracket, and that your cost of capital is 13%.

? The firm adjusts its projects with risk adjusted discount rates to account for project risks.

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 $(15,000) $(19,000) 1 $5,000 $6,000 $3,000 $4,000 2 $5,000 $6,000 $5,000 $6,000 3 $5,000 $6,000 $7,000 $8,000 $5,000 $6,000 $11,000 $12,000 Note that Project A is a Highest risk project while Project B is of Average risk. " Assume your firm is in the 40% tax bracket, and that your cost of capital is 13%. 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 11% Average Risk equal to Firm Average Risk 13% Above Average Higher than Normal but Not Excessive Risk 15% Highest Risk Extremely High Risk 19%