Question
Capital Budgeting For the following two projects, determine the 1. Payback Period 2. Discounted Payback 3. Net Present Value 4. Profitability Index (Benefit-Cost Ratio) 5.
Capital Budgeting For the following two projects, determine the 1. Payback Period 2. Discounted Payback 3. Net Present Value 4. Profitability Index (Benefit-Cost Ratio) 5. Internal Rate of Return 6. Modified Internal Rate of Return Project A Project B Year Net Income Cash Flow Net Income Cash Flow 0 (15,000) (19,000) 1 5,000 6,000 3,000 4,000 2 5,000 6,000 5,000 6,000 3 5000 6,000 7,000 8,000 4 5,000 6,000 11,000 12,000 Risk Index 1.80 .60 The firms cost of capital ko is 15% and the risk free rate Rf is 10%. The firm assesses risk and assigns a risk index to determine a risk adjusted discount rate. An index of 1.0 would be assigned to an average risk project. To determine risk adjusted rates the firm uses the following equation: Risk Adjusted Rate (RADR) = Rf + [Risk Index (ko Rf) Task: Rank the projects in accordance with each method of analysis..
|
| Project A |
|
| Project B |
|
|
| Year |
| Net Income | Cash Flow |
| Net Income | Cash Flow |
| 0 |
|
| (15,000) |
|
| (19,000) |
| 1 |
| 5,000 | 6,000 |
| 3,000 | 4,000 |
| 2 |
| 5,000 | 6,000 |
| 5,000 | 6,000 |
| 3 |
| 5000 | 6,000 |
| 7,000 | 8,000 |
| 4 |
| 5,000 | 6,000 |
| 11,000 | 12,000 |
| Risk Index | 1.80 |
|
| .60 |
|
|
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