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Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($)...

Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following:

Project A                              Project B

Year 0    -6000 -17500

Year 1    2000                                       5600

Year 2    2000                                       5600

Year 3    2000                                       5600

Year 4    2000                                       5600

Year 5    2000                                       5600

Year 6    4000                                       9000

If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company.


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Expert Solution

If the projects are mutually exclusive, the Project B is recommended since it has higher NPV of $6,519.36 despite contradicting results in IRR and dicounted paback periods method. NPV helps in calcualting the returns in the absolute terms which eases the managerial decision making.

jeff jeffy answered 2 years ago
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