Delta Construction Group

Scenario: Capital Budgeting and Investment Analysis

Project Details:

• Project A:
  • Initial Investment: $500,000
  • Annual Cash Inflows: $150,000 for 5 years
  • Salvage Value: $50,000

• Project B:
  • Initial Investment: $700,000
  • Annual Cash Inflows: $200,000 for 4 years
  • Salvage Value: $0

Requirements:

1. Net Present Value (NPV) Analysis:
   • Calculate the net present value for both Project A and Project B at Delta Construction Group using a discount rate of 10%. Interpret the results and make a recommendation regarding the viability of each project.

1. Internal Rate of Return (IRR) Calculation:
   • Determine the internal rate of return for Project A and Project B. Compare the IRR with the company's required rate of return (10%) and assess the attractiveness of each project.

1. Payback Period Analysis:
   • Compute the payback period for Project A and Project B. Evaluate the risk associated with the longer payback period of Project B compared to Project A.

1. Risk and Sensitivity Analysis:
   • Conduct a risk and sensitivity analysis for both projects, considering potential changes in cash inflows and discount rates. Discuss how these factors could impact the investment decision.

1. Strategic Investment Decision:
   • Based on the financial analysis and strategic considerations, recommend whether Delta Construction Group should proceed with Project A, Project B, both, or neither. Justify your recommendation based on capital budgeting principles.