Problem:
The Sunny Company is considering two different capital budgeting projects with the following data regarding projections:
Project A Project B
Investment required immediately $20,000 $50,000
Annual cash inflow expected $10,000 over 4 yrs $10,000 over 10 yrs
Depreciation over specified number
of years with no salvage value expected 4 years 10 years
The company requires a 12% hurdle rate. Use the PV tables in Appendix I.
Required:
1. Calculate the payback period for both projects.
2. Calculate the simple rate of return for both projects.
3. Calculate the NPV for both projects.
4. Calculate the project profitability index for both projects.
5. Indicate which project you would choose if there were funds for only one project.