Question: 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:
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|
Bridge
|
Ferry
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|
Investment year 0
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$4,000,000
|
$1,000,000
|
|
Annual revenue
|
|
|
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Year 1
|
0
|
$750,000
|
|
Year 2
|
0
|
$750,000
|
|
Years 3-10
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$1,500,000
|
$750,000
|
|
Annual operating cost
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$250,000
|
$100,000
|
|
Cost of capital
|
10%
|
10%
|