A company is considering four capital budgeting projects. Data relative to each is given below. Project A has a life of 8 years & B has a life of 7 years. Project C has a 5 year life & D has a life of 6 years. The company uses the Net Present Value (NPV) method to evaluate capital budgeting projects and its discount rate is 5.5%.
Project A Project B Project C Project D
Initial cash outlay (cost) -$2,500,000 -$2,000,000 -$3,200,000 -$11,200,000
Cash inflows per year $390,000 $300,000 $675,000 $1,175,000
Residual value $120,000 $0 $50,000 $0
(Calculating the Projects NPV is worth 40pts)
If the projects are mutually exclusive, which, if any, should the company accept? Why? 10pts
If the projects are independent, which, if any, should the company accept? Why? 10pts
One of the company’s managers states “To me, no matter what else we do, Project D needs to be our first choice because it has the highest cashflows per year.” Comment on this manager’s proposal, considering the concepts of NPV and Payback Method. 10pts
Calculate the payback period for each project (20pts). Can you accept any projects just based on the backpack period? Which ones and why? 10pts