The first capital budgeting session will focus on the different criteria that the board could use to

evaluate proposed capital expenditures. ABC$$s top managers have discussed the

appropriateness of different criteria, including the choice between NPV and IRR, and that will

be one focus of the session.

ABC has a capital budgeting model to analyze all of its proposed projects. The model first

forecasts each project$$s cash flows, after which it calculates the payback, discounted payback,

Net Present Value $($NPV$),$ Internal Rate of Return $($IRR$),$ and Modified Internal rate of Return

$($MIRR$).$

Only the directors have participated in the prior sessions. Those executives must provide

critical inputs for capital budgeting decisions, and the president wants to make sure that all

participants know how the data they provide will be used to analyze capital budgeting

decisions. In addition, several executives have questioned the weights that have been given to

the decision criteria in actual capital budgeting decisions. For example, both the controller and

the VP for marketing think that the most weight should be given to the payback, and that any

project with a payback of less than $3$ years should be accepted. Similarly, the VP for production

thinks that the Payback is the best method, but several directors seem more comfortable with

the IRR. You personally would like to consider only the NPV had the President not interceded

and asked you to calculate all $5$ criteria.

The first part of the analysis will be to evaluate the net cash flows for project A and B that are

mutually exclusive. The projects are both to produce batteries for electric cars. The timing of

the cash flows are different as they relate to the strategy on how the product will be rolled out

and the aggressiveness of the marketing campaign for the batteries. The company$$s current

cost of capital is given, but your responsibility is to analyze the projects to determine which

project would be preferred for the possible range of costs of capital.

The second part of the analysis refers to analyzing mutually exclusive projects that have

different lives. The projects lives relate to the investment in the required equipment. Longer

lasting more expensive equipment is what project BB entails. Conversely, project AA entails

cheaper equipment that will not last as long as the equipment proposed for project BB$.$

Questions

Calculate the NPV$,$ IRR, modified IRR $($MIRR$),$ payback and discounted payback for Projects A

and B$.$ Construct an NPV profile that details under what circumstances you would select one

project over the other. Based on all your data, which project do you suggest that the company

pursue?$-$ Show your table and the graph!