1. How is capital budgeting similar to security valuation? How is it different? Explain.

2. How are project classifications used in the capital budgeting process?

3. What types of projects require the least detailed and the most detailed analysis in the capital budgeting process?

Solve the following questions using BA II PLUS CALCULATOR (you can solve using the formula (manually) to crosscheck answers).

• Make Time-lines for all questions
• Mention appropriate BA II Plus function keys
• NO MARKS IF TIME-LINE AND CALCULATOR KEYS ARE NOT SHOWN!!

4. A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11 %. What is the project's NPV? (Hint: Begin by constructing a time line.)

5. Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:

YEAR	PROJECT A	PROJECT B
1	5,000,000	20,000,000
2	10,000,000	10,000,000
3	20,000,000	6,000,000

1. What are the two projects' net present values, assuming the cost of capital is 5%? 10%? 15%?
2. What are the two projects' IRRs at these same costs of capital?

6. Davis Industries must choose 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. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year.

Calculate the NPV and IRR for each type of truck, and decide which to recommend.