Question

Your first assignment in your new position as an assistant financial analyst at Caledonia Products is to evaluate two new​ capital-budgeting proposals. Because this is your first​ assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the​ capital-budgeting process. This is a standard procedure for all new financial analysts at​ Caledonia, and it will serve to determine whether you are moved directly into the​ capital-budgeting analysis department or are provided with remedial training. The memorandum you received outlining your assignment​ follows:

​To: New Financial Analysts

​From: Mr. V.​ Morrison, CEO, Caledonia Products ​Re:

Capital-Budgeting Analysis Provide an evaluation of two proposed​ projects, both with 55​-year expected lives and identical initial outlays of $150,000. Both of these projects involve additions to Caledonia's highly successful Avalon product​ line, and as a​ result, the required rate of return on both projects has been established at 14 percent. The expected free cash flows from each project are shown in the popup​ window:

Initial outlay	Project A: −​$150,000		Project B: −​$150,000
Inflow year 1	30,000		40,000
Inflow year 2	20,000		40,000
Inflow year 3	50,000		40,000
Inflow year 4	40,000		40,000
Inflow year 5	70,000		40,000

1.What is the payback period on project​ A?

2.What is the payback period on project​ B?

3.What is the NPV of project​ A?

4.What is the NPV of project​ B?

5.What is the PI for project​ A?

6.What is the PI for project​ B?

7.What is the IRR for project​ A?

8.What is the IRR for project​ B?

Answer 1