Capital investment decisions

The following information relates to three possible capital expenditure projects.

Because of capital rationing only one project can be accepted

Project A Project B Project C

Initial cost $230,000 $235,000 $190,000

Expected life 5 years 5 years 4 years

Scrap value expected $10,000 $15,000 $10,000

Expected cash inflows:

End year 1 80,000 90,000 40,000

End year 2 70,000 75,000 65,000

End year 3 65,000 55,000 95,000

End year 4 60,000 50,000 100,000

End year 5 45,000 50,000

The company estimates cost of capital is 18%. The table below shows the present

value of $1 at 14%, 18% and 22%

Periods 14% 18% 22%

1 0.877 0.847 0.820

2 0.769 0.718 0.672

3 0.675 0.609 0.551

4 0.592 0.516 0.451

5 0.519 0.437 0.370

6 0.456 0.370 0.303

Required:

Calculate:

(a) The net present value for each project

(b) The internal rate of return

(c) Explain the factors that management would need to consider in addition to the financial factors before making a final decision of a project