Question
Question 3 (25 marks) Capital Budgeting Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial
Question 3 (25 marks) Capital Budgeting
Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment of $9,600. Mike Steal Company has a doubt about which investment opportunity is going to provide a higher return to the company.
| Year | Investment A | Investment B |
| 2021 | $8,200 | $12,000 |
| 2022 | 7,400 | 10,500 |
| 2023 | 7,100 | 9,000 |
Required:
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Compute the present value of the cash inflows for each investment using a 16% discount rate.
(6 marks)
|
| Amount of Cash Flows | Present Value of Cash Flows | ||
| Year(s) | Investment A | Investment B | Investment A | Investment B |
| 2021 | $8,200 | $12,000 |
|
|
| 2022 | 7,400 | 10,500 |
|
|
| 2023 | 7,100 | 9,000 |
|
|
| Total |
|
|
|
|
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Compute Net Present Value. (6 marks)
|
| Investment A | Investment B |
| Present Value of Cash Flows
|
|
|
| Initial Cost
|
|
|
| Net Present Value (NPV)
|
|
|
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Which investment opportunities should be accepted based on the NPV analysis? Why?
(3 marks)
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What is the Payback period for Investment A and Investment B? (8 marks)
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Which investment opportunities should be accepted based on the payback period? Why?
(2 marks)
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