A company is considering three capital budgeting projects. Each project requires an initial outlay of $4,000,000. Cash inflows for each project are given in the table below. Each project has a life of 3 years. The company uses the NPV method to evaluate capital budgeting projects and its required rate of return is 9%. Here are the cash inflows from the projects.
Project A Project B Project C
Year 1 $1,900,000 0 $1,000,000
Year 2 $1,900,000 0 $2,000,000
Year 3 $1,900,000 $6,000,000 $2,000,000
1. Perform all relevant calculations to determine NPV for each project. Show all work and perform all time value computations using the time value functions in Excel.
A. If the projects are independent, which, if any, should the company accept? Why?
c. If the projects are mutually exclusive, which, if any, should the company accept? Why?
D. One of the company’s managers states “To me, no matter what else we do, Project B needs to be our first choice because it has the largest cash inflows of $6,000,000”. Comment on this manager’s proposal, considering the tenets of NPV and based on your computations.