Provide an evaluation of the three proposed projects whose cash flow forecasts are found below:

Product AProduct BProduct C

Initial cost$750,000$650,000$515,000

Expected life 5 years 5 years 4 years

Scrap value expected$-$35,000$40,000

Others expected cash inflows:

Year $$$

1180,000200,000300,000

2300,000240,000210,000

3230,000210,000 60,000

4330,000260,000220,000

5195,000155,000

The company cost of capital for each project is 13 percent. The company relies on several criteria when evaluating new investment opportunities. The projects are independent.

A. What is Capital Budgeting and give four reasons capital budgeting decisions are important.

4 marks

B. Compute the ARR for each project6 marks

C. Compute the payback period for each project6 marks

D. Compute the Net Present Value (NPV) for each project9 marks

E. Compute the Profitability Index (PI) for each project3 marks

F. If the projects are mutually exclusive, which project should be accepted and why?