Module 3: Capital Budgeting

Problem Sheet

Please show all your work.

1. What is the payback period for a project that has an initial investment of $100,000 and has an annual cash inflow of $25,000 each year?

2. A company is considering a project with an initial investment of $80,000. The annual inflow from the project is $10,000 for ten years. The salvage value for the project is $12,000 in year ten. The cost of capital is 12%. What is the net present value? Should the company make this investment? (Round all numbers to whole numbers.)

3. A company is considering a project with an initial investment of $200,000. The annual inflow from the project is $50,000 for ten years. The salvage value for the project is $20,000 in year ten. The cost of capital is 6%. What is the net present value? Should the company make this investment? (Round all numbers to whole numbers.)

4. The following information relates to a capital project that will last for five years (dollars are in thousands). The discount rate is 10%. What is the net present value? Should the company make this investment? (Round all numbers to whole numbers.)

Purchase of land and building ($2,450)

Training of staff ($50)

Annual cash inflow from new facility $2,100

Annual cash outflow from new facility ($1,800)

Salvage value of facility in five years $500