Emmitsburg Brewing Company is considering three mutually exclusive investment alternatives. Its estimated weighted average cost of capital, used as the discount rate for capital budgeting purposes, is 12%. Following is information regarding each of the three projects:

                                                                                           Project A            Project B             Project C

Required investment outlay                                             500,000             100,000               215,000

Incremental after-tax cash in lows/year                         140,000             33,000                 85,000

Estimated project life (years)                                              6                        5                          4

Estimated salvage value (end of life)                                10,000                5,000                  0

(a) Compute the net present value of each project and determine which alternative, based on NPV, is most desirable.

(b) Compute the profitability index (PI) for each alternative and state which alternative, based on PI, is most desirable.

(c) Compute the internal rate of return (IRR) for each alternative and state which alternative, based on IRR, is more desirable.

(d) Why do the project rankings differ under the three methods of analysis? Which alternative would you recommend, and why?

Answer rating: 100% (QA)

Project to be ... View the full answer