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A. Facts Enterprises is trying to select the best investment from among four alternative independent projects presented by their respective firms. Each alternative involves an
- A. Facts Enterprises is trying to select the best investment from among four alternative independent projects presented by their respective firms. Each alternative involves an initial outlay of $80,000 and a 10% cost of capital. Management requires that all project investments should be recovered in 4 years. Their cash flows follow:
- Calculate each project's Payback Period. Based on the payback periods, which project(s) should they accept if the project(s) are independent. Which project(s) should they accept if the projects are mutually exclusive?
Year | Sun Ltd | Moon Ltd | Best Ltd | Pep Ltd |
1 | 30,000 | 20,000 | 20,500 | 0 |
2 | 25,000 | 30,000 | 20,500 | 30,000 |
3 | 20,000 | 0 | 20,500 | 0 |
4 | 15,000 | 20,000 | 20,500 | 28,000 |
5 | 10,000 | 10,000 | 20,500 | 25,000 |
6 | 5,000 | 30,000 | 0 | 40,000 |
Calculate each project's Net Present Value (NPV). Based on the NPVs, which project(s) should they accept if the project(s) are independent. Which project(s) should they accept if the projects are mutually exclusive?
- Calculate the discounted payback period for the projects with positive NPVs.
- What does it mean for projects to be mutually exclusive? How should managers rank mutually exclusive projects?
B. What are the strength and weaknesses of each of the following capital budgeting technique below? | |
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