Problem 2 - Capital Budgeting and Resource Allocation (50 Points) Suppose you are the capital-budgeting analyst for a company considering investments in the eight projects listed in the table below. The chief financial officer of your company has asked you to rank the projects and recommend "three best that the company should accept in preparation for a meeting with the capital budgeting committee of the company's Board of Directors. No other project characteristics are deciding factors in the selection, except that management has determine that projects 4 and 5 are together mutually exclusive and that projects 7 and 8 are also together mutually exclusive (but are separately mutually exclusive from projects 4 and 5). All the projects require the same initial investment of $3 million. Moreover, all are believed to be of the same risk class and the appropriate discount rate to be used is 9% an Excel Spreadsheet can be found in D2L) Project free cash flows in thousands of dollars) Project number Initial Investment Year $13,000.00) $18,000.00 1 $ 495.00 $ 2,499.00 2 S 96.00 $ 501.00 3 $ 495.00 $ 247.50 4 $ 495.00 5 $ 495.00 6 $ 495.00 7 $ 495.00 8 $ 1.500.00 $ (3,000.00) $13,000,00) $(3,000.00) $18,000,00) $18.000,00) $18,000.00) $ - $ 240.00 $ 500.00 $ 3,300.00 $ 1.800.00 $ (525.00) $ - $ 300.00 $ 500.00 $ 1,350.00 $ 190,00 $ - $ 525.00 $ 500.00 $ 450.00 $ 90,00 - $ 592.50 $ 500.00 $ 135.00 $ 525.00 $ 648.00 $ 500.00 $ 105.00 $ 1,050.00 $ 660.00 $ 500.00 $ 100.00 $ 1,800.00 $ 663.00 $ 500.00 $ 100.00 $ 3,375.00 $ 666.00 $ 500.00 $ 500.00 $ 500.00 . $ 669.00 $ 500.00 $ - $ 672.00 $ 500.00 $ - $ 675.00 $ 500.00 $ - $ 676.50 $ 500.00 $ - $ 676.50 $ . $ 678.00 $15,000.00 $(3,000.00) Tasks: 1. For each of the eight projects find their: a. Net Present Values (8 points) b. Internal Rates of Return (8 points) c. Profitability Indexes (8 points) d. Equivalent Annual Annuities (8 points) 2. Based on your rankings, which of the three projects would you recommend? To be awarded any points you have to explain to the CFO how you arrived at your choices. (18 points) Project number Initial Investment Project free cash flows (in thousands of dollars) 2 3 5 7 $ (3,000.00) $ (3,000.00) $ (3,000.00) $ (3,000.00) $ (3,000.00) $ (3,000.00) $ (3,000.00) $ (3,000.00) $ 240.00 $ 500.00 $ 3,300.00 $ 1,800.00 $ (525.00) 2 $ 495.00 $ 501.00 S . $ 300.00 $ 500.00 $ 1,350.00 $ 190.00) 3 $ 495.00 $ 247.50 $ - $ 525.00 $ 500.00 $ 450.00 $ 90.00 4 $ 495.00 $ 592.50 $ 500.00 $ 135.00 $ 525.00 5 $ 495.00 $ 648.00 $ 500.00 $ 105.00 $ 1,050.00 6 $ 495.00 660.00 $ 500.00 $ 100.00 $ 1,800.00 7 $ 495.00 663.00 $ 500.00 $ 100.00 $ 3,375.00 8 $ 1,500.00 666.00 $ 500.00 $ 500.00 $ 500.00 669.00 $ 500.00 672.00 $ 500.00 $ 675.00 $ 500.00 676.50 $ 500.00 676.50 $ 678.00 $ 15,000.00 $ (3,000.00) Year