Question

Mutually exclusive Projects	Project A	Project B	Project C
Initial cash Outlay	(50,000)	(60,000)	(40,000)
Required Rate of Return	11%	8%	13%
Cash Flows:
Inflow Year 1	10,000	30000	8,000
Inflow Year 2	15,000	50000	20,000
Inflow Year 3	20,000	5000	20,000
Inflow Year 4	25,000	5000	20,000
Inflow Year 5	30,000	2000	15,000

Step 1

Your first assignment as a financial analysis manager at Caledonia Products is to evaluate three new capital budget proposals. You have been asked to do the project analysis calculations and make a recommendation as to which project the company should accept. You will be calculating the Net Present Value, the Internal Rate of Return, the Profitability Index and the Pay Back Period for each of the three Projects. Because this is your first big project, you must also respond to several key questions aimed at assessing your understanding of the capital budgeting process. looking at ranking various possible projects. List one factor you should consider in this decision.

1. Do the analysis calculations and submit them with your response.
2. Recommend which project to accept.
3. Answer the following questions:

    a. Why is the capital budgeting process so important?    b.  What are the advantages and disadvantages of using the Pay Back Period method?    c. What are the advantages and disadvantages of using the Net Present Value method?    d. What are the advantages and disadvantages of using the Internal Rate of Return method?    e. What are the advantages and disadvantages of using the Profitability Index method?

Answer 1

As per rules I am answering the first 4 subparts of the question

	Project A		Project B		Project C
NPV	$20,078.99		$19,650.20		$17,011.36
IRR	23.29%		26.50%		27.78%
Profitability Index	1.40		1.33		1.43
Payback	3.2		1.6		2.6

WORKINGS

Cash flows and cumulative cash flows are as below

Mutually exclusive Projects	Project A	Cumulative CF	Project B	Cumulative CF	Project C	Cumulative CF
Required Rate of Return	11%		8%		13%
Initial cash Outlay	-50000	-50000	-60000	-60000	-40000	-40000
1	10,000	-40,000	30000	-30,000	8,000	-32,000
2	15,000	-25,000	50000	20,000	20,000	-12,000
3	20,000	-5,000	5000	25,000	20,000	8,000
4	25,000	20,000	5000	30,000	20,000	28,000
5	30,000	50,000	2000	32,000	15,000	43,000

WORKINGS