Capital Budgeting Project
1. Jordan Enterprises have a maximum 5 year acceptable payback period. The firm is considering the purchase of a new machine and must choose between 2 alternatives. The first machine requires an initial investment of $14,000 and generates after-tax cash inflows of $3000 for each of next 7 years. The second machine requires an initial investment of $21,000 and provides annual cash inflow after-taxes of $4000 each year for 20 years. Determine the payback period for each machine. Which machine should you accept and why?
2. Calculate the payback and net present value (NPV) for the following 20 year projects. Comment on the acceptability of each; assume the firm has a cost of capital of 14%?
Initial Investment is $10,000, cash inflows $2000 per year Initial Investment is $25,000, cash inflows $3000 per year Initial Investment is $30,000, cash inflows $5000 per year
3. Avon Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of $5000 per year for 8 years. Calculate Avon's payback period? Calculate the project's net present value (NPV) at 10%, 12%, and 14% cost of capital and explain your decision?
4. Jones Corporation is attempting to choose the better of 2 mutually exclusive projects for expanding the firm's warehouse capacity. The firm's cost of capital is 15%. Calculate each project's payback period, net present value (NPV), and its internal rate of return (IRR)?
L M
Initial Investment $500,000 $325,000
Year cash inflows
1 $100,000 $140,000
2 $120,000 $120,000
3 $150,000 $95,000
4 $190,000 $70,000
5 $250,000 $50,000
5. Vineyard Industries is considering investing in one of three mutually exclusive projects, A, B, and C. The firm's cost of capital is 15%and the risk-free rate, (RF), is 10%.
Calculate the payback, NPV, IRR, and the risk-adjusted discount rate (RADR) for each project?
A B C
I.I. $15,000 $11,000 $19,000
Year cash inflows
1 $6000 $6000 $4000
2 $6000 $4000 $6000
3 $6000 $5000 $8000
4 $6000 $2000 $12000
R.I. 1.80 1.0 .60