A company is considering three capital budgeting projects. Data relative to each is given below. Each project has a life of 5 years. The company uses the NPV method to evaluate capital budgeting projects and its discount rate is 9%. Project A Project B Project C Initial cash outlay (cost) -$5,000,000 -$6,000,000 -$3,000,000 Cash inflows per year $1,500,000 $1,800,000 $ 600,000 Residual value $ 500,000 0 $100,000
1. If the projects are mutually exclusive, which, if any, should the company accept? Why?
2. If the projects are independent, which, if any, should the company accept? Why? 3. One of the company’s managers states “To me, no matter what else we do, Project C needs to be our first choice because it has the lowest initial cost of $3,000,000.” Comment on this manager’s proposal, considering the tenets of NPV.