Question
The management of Integrated Manufacturing (IM) is considering two capital budgeting projects: Projects E and F. Estimates of the projects free cash flow streams appear
The management of Integrated Manufacturing (IM) is considering two capital budgeting projects: Projects E and F. Estimates of the projects free cash flow streams appear below. Management requires a 15% annual rate of return on projects like these. Management also wants projects to earn back their initial cash costs within 2 years.
Project Year | 0 | 1 | 2 | 3 | 4 |
Project E | $500k | $175k | $225k | $300k | $375k |
Project F | $5,000k | $1,500k | $1,750k | $2,250k | $2,750k |
Suppose management is interested in Project E alone. (Project F is irrelevant.)
7. Using the payback (PB) rule, management should
a. reject the project because the PB period is 2 1/3 years which is less than 2 years.
b. accept the project because the PB period is 2 1/3 years which is less than 2 years.
c. accept the project because the PB period is 3 years which is greater than 2 years.
d. reject the project because the PB period is 3 years which is greater than 2 years.
8. Using the profitability index (PI) rule, management should
a. reject the project because PI = 0.41 < 1.
b. accept the project because PI = 1.47 > 0.
c. accept the project because PI = 1.47 > 1.
d. accept the project because PI = 2.15 > 0.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started