Question: Exercise Example - Capital Budgeting Project Analysis - Chapter 5 As director of capital budgeting, you are reviewing three potential investment projects with the following
Exercise Example - Capital Budgeting Project Analysis - Chapter 5
As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections.
| Cash Flow | Project A | Project B | Project C |
| Investment Cost | ($500,000) | ($375,000) | ($475,000) |
| Year One Cash Flow | $200,000 | $175,000 | $250,000 |
| Year Two Cash Flow | $180,000 | $50,000 | $200,000 |
| Year Three Cash Flow | $100,000 | $50,000 | $75,000 |
| Year Four Cash Flow | $80,000 | $50,000 | $30,000 |
| Year Five Cash Flow | $140,000 | $300,000 | $30,000 |
Calculate the Internal Rate of Return (IRR) for each project.
Solution:
Assuming your capital investment budget of $500,000 will only allow selection of one project (thus the projects are now mutually exclusive), which project should you fund?
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