Task:

Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.

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 and attached.

 

                        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?

Submission Instructions:

  • Attention: Complete and submit the assignment by 10:00 PM ET Friday.
  • You should submit your completed work in a Word document or Excel spreadsheet if needed.