Homework: Capital Budgeting Project Analysis
Task:
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.
Relevant information:
• The firm uses a 3-year cutoff when using the payback method.
• 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
I. 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?
II. 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?
Format your homework according to the give formatting requirements:
• The answer must be using Times New Roman font (size 12), double spaced, typed, with one-inch margins on all sides.
• The response also includes a cover page containing the student's name, the title of the homework, the course title, and the date. The cover page is not included in the required page length.
• Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.