Hello,

I need help solving this mini case. I need to provide an evaluation of two proposed projects, both with 5- year expected lives and initial outlays of $110,000. Both projects involves additions to Caledonia's highly successful Avalon product line and as a result, the required rate of return on both have been established at 12%. The expected cash flow is as follows:

Thanks.

UIH'l'E!l CAPITAL-BUDGETING TECHNIQUES AND PRACTICE 293 Avalon product line, and as a result, the required rate of return on both projects has been established at 12_percent. The expected free cash flows from each project are as follows: Initial outlay Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 In evaluating these projects, please respond to the following questions: . _ a. Why is the capital-budgeting process so important? -pronde5 v, St'l?t I +:; ) ontl. \\ 1 b. Why i'[-it difficult to find exceptionally profitable projects? c. VVhat is the payback period on each project? If Caledonia imposes a 3-year maximum ac- ceptable payback period, which of these projects should be accepted? d. VVhat are the criticisms of the payback period? e. Detehnine the NPV for each of these projects. Should they be accepted? f. Describe the logic behind the NPV. g. Determine the PI for each of these projects. Should they be accepted? h. Would you expect theNPVand PI methods to give consistent accept/reject decisions? "Why or why not? i. "What W(Imld happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased? - j. Determine the IRR for eacb project. Should they be accepted? k. How does a change in the required rate of return affect the project's internal rate of return? I. 'What reinvestment rate assumptions are implicidy made by the NPV and IRR methods? VVhich one is better? You have also been asked for your views on three umelated sets of projects. Each set of projects involves two mutually exclusive projects. These projects follow. m. Caledonia is considering two investments with 1-year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent Given the following free cash flows: PROJI:CT A Initial outlay Inflow yea1 PROJECT B -$195,000 240,000 -$1,200,000 1,650,000 1. Calculate the NPV for eacb project. 2. Calculate the PI for eacb project. 3. Calculate the IRR for eacb project. 4. If there is no capital-rationing constraint, which project should be selected? H there is a capital-rationing constraint, how should the decision be made? n. Caledonia is considering two additional mutually exclusive projects. The free cash flows as sociated with these projects are as follows: Initial outlay Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 The required ate of return on these projects is 11 percent. 1. "What is each project's payback period? 2. "What is eacl1 project's NPV? 3. What is each project's IRR? 4. VVhat has caused the ranlcing- conflict? ('" '---,-& Q.-\\' f,;,;.-. :,,")l.;.,JI{f \\ hl ro_, --:.-.c:-'' G\\U\\"1 ) C:::r c:=: f-' Ct'!"'itf'"t'> )(" J 5. Which project should be accepted? Why? UllflfH'! r:':;;,\\ a. VVhy is the capital-budgeting process so important? -pto\ c\\_1(_5 v- :::,,p, 1 +:1 ) anti. b. Why i'!'it difficult to find exceptionally profitable projects? rif