Question

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.

	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?

Answer 1