Question
Ralph Lawrence is considering two mutually exclusive projects. Each has an initial investment of $180,000. The company is uncertain about the best capital budgeting technique
Ralph Lawrence is considering two mutually exclusive projects.
Each has an initial investment of $180,000.
The company is uncertain about the best capital budgeting technique to use.
Its maximum acceptable payback period is 4 years and its cost of capital is 9%.
The cash flows for each of the projects are shown in the table.
Which project, if any, should Ralph Lawrence take? SHOW YOUR WORK, EXPLAIN YOUR REASONING
| Year | Cash inflows | |
| Project A | Project B | |
| 1 | $55,000 | $95,000 |
| 2 | $55,000 | $70,000 |
| 3 | $55,000 | $40,000 |
| 4 | $55,000 | $40,000 |
| 5 | $55,000 | $20,000 |
| 6 | $55,000 | $20,000 |
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The Theory And Practice Of Investment Management
Authors: Frank J Fabozzi, Harry M Markowitz
2nd Edition
0470929901, 9780470929902
