Capital Budgeting Review the case study provided below and then answer the questions that follow and explanations
Question:
Capital Budgeting Review the case study provided below and then answer the questions that follow and explanations where needed. Provide all calculations.
I. Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach.(5)
II. Projects M and N, of equal risk, are alternatives for expanding Retail Audacity Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table
Year | Project m | Project N |
Initial outlay | R800 000 | R800 000 |
1 | R150 000 | R150 000 |
2 | R200 000 | R350 000 |
3 | R250 000 | R300 000 |
4 | R300 000 | R150 000 |
5 | R350 000 | R50 000 |
The management of Retail Audacity has stated that they would like a payback period of two years, if possible, due to the uncertainty caused by the Covid-19 pandemic on these two projects.
REQUIRED:
Evaluate the two (2) projects Retail Audacity Company
Apply capital budgeting techniques.
Recommend, with justification, which project should be accepted (15) (SHOW ALL WORKINGS)