Part I Intrek, Inc. is evaluating three capital budgeting projects with code names A, B and C. Investment in all three projects is supposed to take place immediately (t=0). The inflation rate is assumed to be equal to zero over the lives of the three projects. The three projects are of identical risk and the company believes 11% is the appropriate discount rate. The effective tax rate for the company is 40%. Project A has an immediate cost of $200,000 in addition to its installation cost of $12,500. This project will provide the company with pre-tax cost savings of $60,000 at the end of each of the next eight years. Project A falls in the 5-year MACRS class and has a zero salvage value at the end of its eighth year. Project B requires an initial investment of $120,000 and its only net cash inflow of $150,000 occurs at the end of the first year of its life. Project C requires an initial investment of $30,000. The project provides a net cash flow of $150,000 at the end of the first year and calls for a net cash outflow of $120,000 at the end of the second year of its life. You are expected to rank the three projects for Intrek. Use several quantitative capital budgeting criteria to rank these projects and report your rankings. Most likely you will get different rankings for the different criteria. Nevertheless, your boss expects you to recommend only one ranking; the best ranking. First, provide your best ranking assuming projects A,B, and C are independent of each other. Second, provide your best ranking assuming that projects A and B are mutually exclusive and both independent of project C. Furthermore, if projects A and B are mutually exclusive your boss wants you to determine for what discount rates project A will be chosen over B and for what discount rates project B will be preferred over A. Regardless of whether projects A and B are independent of each other or mutually exclusive, it is very important that you justify in detail your best ranking. Part II Intrek is also considering a fourth project with code name D. Project D requires an initial investment of $40,000 and is expected to provide annual cash flows of $6,000 at the end of each of the next ten years. Intrek is exploring the possibility of a subsidy for project D from the State of Iowa in which it operates. The State has expressed an interest in providing a subsidy that will result in a five-year payback period for project D. The Treasurer of the State of Iowa will present the subsidy proposal to the State's Finance Committee in a couple of days. From past experience he expects the members of that committee to ask how much will the subsidy be and in which year in the project's life should the subsidy be paid out to Intrek. The Treasurer has asked you to provide answers to the questions he expects the committee members to raise. The appropriate discount rate for project D is 13%. Please explain whether Intrek should accept the subsidy and invest in project D
