DQ 1 - What are the important administrative considerations in the capital budgeting process?
DQ 2 - Why does capital budgeting rely on the analysis of cash flows rather than net income?
DQ 3 - What are the weaknesses of the Payback Method?
DQ 4 - What is normally used as the discount rate in the Net Present Value method?
Problems
5 Assume a $50,000 investment with the following two cash flow alternatives.
OPTION A OPTION B
Year 1 $10,000 $20,000
Year 2 $11,000 $25,000
Year 3 $13,000 $15,000
Year 4 $16,000 0
Year 5 $30,000 0
Which alternative would you select under the Payback Method?
6 In problem 5, if the cash flow for year 5 of Option A was $30,000,000 instead of $30,000, would your answer change under the Payback Method?
11 Home Security Systems is analyzing the purchase of a $40,000 piece of equipment. The cash flows generated will be:
Year 1 $15,000
Year 2 $20,000
Year 3 $25,000
Year 4 $10,000
Year 5 $5,000
What is the procject's Internal Rate of Return (approximate)?
If the Cost of Capital is 12%, should the project be accepted?
13 Hamilton COntrol Systems will invest $90,000 into a project that will generate the following cash flows:
Year 1 $23,000
Year 2 $38,000
Year 3 $60,000
At the end of three years, the company will incur a $15,000 cost to shut the project down.
If the Cost of Capital is 10%, should the project be undertaken? (use the Net present Value method)
15 Hudson Corporation is considering investing $14,400 into a project that will generate the following cash flows:
Year 1 $7,000
Year 2 $7,000
Year 3 $4,000
Assuming a cost of capital of 11%, what is the project's Net Present Value?
What is the project's Internal rate of Return?
Should you undertake the project?