2) You are tasked to evaluate two capital budgeting proposals You have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital budgeting process This is a standard procedure for all new financial analysts at Axelon , and it will serve to determine whether you are moved directly into the capital budgeting analysis department or are provided with remedial training Provide an evaluation of two proposed projects, both with 5 year expected lives and identical initial outlays of $110,000 Both of these projects involve additions to Axelon s highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent The expected free cash flows from each project are as follows Project A Project B Cash Flow Year 1 20000 40000 Cash Flow Year 2 30000 40000 Cash Flow Year 3 40000 40000 Cash Flow Year 4 50000 40000 Cash Flow Year 5 70000 40000 Initial Investment 110000 110000 In evaluating these projects, please respond to the following questions a) Why is the capital budgeting process so important b) Why is it difficult to find exceptionally profitable projects c) What is the payback period on each project If Axelon imposes a 3 year maximum acceptable payback period, which of these projects should be accepted d) What are the criticisms of the payback period e) Determine the NPV for each of these projects Should they be accepted f) Describe the logic behind the NPV g) Determine the PI for each of these projects Should they be accepted h) Would you expect the NPV and PI methods to give consistent accept reject decisions Why or why not i) What would happen to the NPV and PI for each project if the required rate of return increased If the required rate of return decreased j) Determine the IRR for each project Should they be accepted k) How does a change in the required rate of return affect the projects internal rate of return l) What reinvestment rate assumptions are implicitly made by the NPV and IRR methods Which one is better

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2) You are tasked to evaluate two capital-budgeting proposals . You have been asked not only to provide a recommendation but also to respond to

2) You are tasked to evaluate two capital-budgeting proposals. You have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial analysts at Axelon, and it will serve to determine whether you are moved directly into the capital-budgeting analysis department or are provided with remedial training.

Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to Axelons highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows:

	Project A	Project B
Cash Flow Year 1	20000	40000
Cash Flow Year 2	30000	40000
Cash Flow Year 3	40000	40000
Cash Flow Year 4	50000	40000
Cash Flow Year 5	70000	40000
Initial Investment	-110000	-110000

In evaluating these projects, please respond to the following questions:

a) Why is the capital-budgeting process so important?

b) Why is it difficult to find exceptionally profitable projects?

c) What is the payback period on each project? If Axelon imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?

d) What are the criticisms of the payback period?

e) Determine the NPV for each of these projects. Should they be accepted?

f) Describe the logic behind the NPV.

g) Determine the PI for each of these projects. Should they be accepted?

h) Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not?

i) What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased?

j) Determine the IRR for each project. Should they be accepted?

k) How does a change in the required rate of return affect the projects internal rate of return?

l) What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?