Question 2 [ Capital Budgeting decision]

1. What is pay back period ? What are demerits in evaluation of capital budgeting decisions ?
2. Consider the following present value profiles of two mutually exclusive projects A and B :

.

Weighted average cost of capital of the company is 10%.

Which of the two projects should be accepted applying Net Present value method ? Give reason.

Net Present Value (5) Project A's NPV Profile 40g 30d Crossover Rate = 7.2% Project B's NPV Profile IRRB)= 14.5% 7.2% Cost of Capital (%) IRR(A) = 11.8%