CAPITAL BUDGETING

ESSAY QUESTIONS

1. Explain the characteristics of long term capital investments.

2. Illustrate and explain the capital budgeting process.

3. Which capital budgeting is very much helpful in a construction company?

PROBLEM SOLVING

PROBLEM 1

Marilou Company is considering an investment of 130,000 in new equipment. The new equipment is expected to last 10 years. It will have zero salvage value at the end of its useful life . The annual cash inflows are 200,000 and the annual cash outflows are 176,000. The following information is available:

Initial Investment 130,000

Estimates useful life10 years

Estimated salvage value -0-

Estimated annual cash flows

Cash inflows from customers 200,000

Cash outflows for operating costs 176,000

Net annual cash flow 24,000

Required:

A.Compute the payback period.

B.Assuming that the initial investment for Marilou Company is 300,000 and the annual cash flows are as follows:

Year Assumed Net Annual Cash Flows OUT A W N 34,000 30,000 27,000 25,000 24,000 22,000 7 21,000 8 20,000 19,000 10 18,000 240,000 Required: Compute for the company's NPV.