Capital Budgeting Project Analysis

Relevant information:

  1. The firm uses a 3-year cutoff when using the payback method.
  2. The hurdle rate used to evaluate capital budgeting projects is 15%.

The cash flows for projects A, B and C are provided below.

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                   Project A          Project B           Project C

Year 0        -30,000            -20,000               -50,000

Year 1            0                    4,000                  20,000

Year 2        7,000                 5,000                  20,000

Year 3         20,000              6,000                  20,000

Year 4         20,000              7,000                    5,000

Year 5         10,000               8,000                    5,000

Year 6           5,000               9,000                    5,000

  1. Assume the projects are independent and answer the following:
    • Calculate the payback period for each project.
    • Which project(s) would you accept based on the payback criterion?
    • Calculate the internal rate of return (IRR) for each project.
    • Which projects would you accept based on the IRR criterion?
    • Calculate the net present value (NPV) for each project.
    • Which projects would you accept based on the NPV criterion? 
  2. Assume the projects are mutually exclusive and answer the following:
    • Which project(s) would you accept based on the payback criterion?
    • Which projects would you accept based on the IRR criterion?
    • Which projects would you accept based on the NPV criterion?

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