Question Three: (25 marks) Budget Corporation has three projects under construction. The cash flows for each of
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Question Three: (25 marks)
Budget Corporation has three projects under construction. The cash flows for each of them are shown in the following table. The firm has a 16% cost of capital
Project A Project B Project C
Initial investment (CFo) $40 000 $40 000 $40 000
Year(t) Cash inflows(CFt)
1 $13 000 $7 000 $19 000
2 $13 000 $10 000 $16 000
3 $13 000 $13 000 $13 000
4 $13 000 $16 000 $10 000
5 $13 000 $19 000 $7 000
- Calculate the projects payback period. Which project is preferred according to this method (6 marks)
- Calculate each projects net present value (NPV) and Profitability Index. Which is preferred according to these methods (12 marks)
Calculate the IRR of each project and determine the best project overall, comment on your findings in parts a and b, and recommend the best project. Explain your recommendation.
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