Capital Budgeting

For the following two projects, determine the

• Payback Period
• Discounted Payback
• Net Present Value
• Profitability Index (Benefit-Cost Ratio)
• Internal Rate of Return
• Modified Internal Rate of Return

Project A Project B Year Net IncomeCash Flow Net IncomeCash Flow0 (10,000) (10,000)1 7,0009,000 1,0002,0002 1,0002,000 9,00010,000

• Note that Project A is a Below Average risk project while Project B is of Above Average risk.
• Assume your firm is in the 40% tax bracket, and that your cost of capital is 9%.
• The firm adjusts its projects with risk adjusted discount rates to account for project risks.
• The risk schedule applied is as follows:

Risk ClassDescriptionRADRBelow Average Less than Firm Average Risk8%AverageRisk equal to Firm Average Risk9%Above AverageHigher than Normal but Not Excessive Risk10%Highest RiskExtremely High Risk15%