Davis Industries is choosing between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one i.e., they are mutually exclusive investments. The cost of capital is 10%. The director of capital budgeting has provided the expected cash flows of the machines as follows:

Expected Net Cash Flows
Year	Machine A	Machine B
0	($50,000)	($50,000)
1	25,000	15,000
2	20,000	15,000
3	10,000	15,000
4	5,000	15,000
5	5,000	15,000

6. Calculate the payback period and profitability index for each machine.

7. Calculate net present value (NPV) and internal rate of return (IRR) for each machine.
8. Using the NPV technique, which machine should be recommended?

The director of capital budgeting has asked you to include risk analysis in your report. He wants you to explain risk in the context of capital budgeting, and how the risk can be analyzed.

9. Explain three types of risk that are relevant in capital budgeting decisions.
10. How is each of these risk types measured?