The Formula Method

Capital Budgeting & Misc. CF NPV = t=0 (1 + k) n CF, IRR = NPV = { = 0 t=0 (1+ irr)? Payback Period - Years before cost recovery Remaining cost to recover + Cash flow during the year E WACC = E +D sket -kp E +D (Time-disparity problem) The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with these projects are shown in the popup window: : . The required rate of return on these projects is 7 percent. a. What is each project's payback period? b. What is each project's NPV? c. What is each project's IRR? d. What has caused the ranking conflict? e. Which project should be accepted? Why? X i Data Table Initial outlay Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 PROJECT A - $70,000 19,625 19,625 19,625 19,625 19,625 PROJECT B - $70,000 0 0 0 0 120,000 Print Done