Learning Team Case
A firm has five identified capital projects they could fund in the upcoming year. Each project has a initial capital cost of $5,000,000, however the firm only has $15,000,000 allocated for capital projects in the current year. The company needs to decide which projects to fund. The firms initial cost of capital (discount rate) is 8%.
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Cash Flows ($ in thousands)
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Projects
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A
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B
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C
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D
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E
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Year 1
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$1,100
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$6,000
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--
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$1,000
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$500
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2
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$1,100
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--
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$1,000
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$2,500
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$1,500
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3
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$1,100
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--
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$2,000
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$3,500
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$3,000
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4
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$1,100
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--
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$3,000
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$2,750
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$3,500
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5
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$1,100
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--
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$2,200
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$1,000
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$4,500
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1. What is the net present value of each investment?
2. According to the net present values, which investment(s) should the firm make? Why?
3. What is the internal rate of return on each investment?
4. According to the internal rates of return, which investment(s) should the firm make? Why?
5. Using the simple payback method which investments should they choose?
6. If the firm could reinvest the $3,600,000 earned in year 1 from investment B at 10 percent, what effect would that information have on your what the return would be on the investment?
If the firm's cost of capital had been 11 percent, what would be NPV of the investments alternatives? What would be the IRR for the investment projects?