Problem:
Make capital budgeting decisions utilizing various capital budgeting models.
1. Payback method
2. Net Present Value method
3. Internal Rate of Return method
Muscatel, Inc. is evaluating whether to build a bridge that will take two years to construct, or use a ferry to transport ore across a river. The cost of each alternative is a follows:
Bridge Ferry
Investment year 0 $4,000,000 $1,000,000
Annual revenue
Year 1 0 $750,000
Year 2 0 $750,000
Years 3-10 $1,500,000 $750,000
Annual operating cost $250,000 $100,000
Cost of capital 10% 10%