Question

1. Consider the following three projects for Ralco Co. This company is in pharmaceutical industry. It currently sells several drugs, including pain reliever and cough medicine. Project A is considered the safest project of these three, while Project C is the riskiest one. There are three discount rates for the capital budgeting; 10 percent for Project A, 13 percent for Project B, and 18 percent for Project C.

Period                                         Project A                           Project B                          Project C

                         T=0                                              ($10,000)                                     ($12,000)                    ($17,000)

                         T=1                                              $1,000                                        $1,900                           $1,900

                         T=2                                              $1,900                                        $1,900                          $1,900

                         T=3                                              $1,900                                        $1,900                          $1,900

                         T=4                                              $2,500                                         $1,900                          $1,900

                         T=5                                              $2,500                                         $2,900                          $1,900

                         T=6                                              $1,800                                         $2,900                          $3,900

                         T=7                                              $1,800                                        $2,900                          $3,900

                         T=8                                              $1,800                                         $3,900                          $3,900

                         T=9                                              $1,800                                         $4,900                          $6,900

Part A- Which project should be chosen under the Payback Period and explain why?

Part B- When you have only $20,000 to support the above projects, which project (or projects) should be chosen under the Net Present Value (NPV) and explain why?

Answer 1