To: New Financial Analysts From: Mr. V. Morrison, CEO, Caledonia Products Re: Capital-Budgeting Analysis Provide an evaluation of two propos shown in the popup window: : In evaluating these projects, please respond to the following questions: a. Why is the capital-budgeting process so important? b. Why is it difficult to find exceptionally profitable projects? c. What is the payback period on each project? If Caledonia imposes a 4-year maximum acceptable payback period, which of these projects should be accepted? d. What are the criticisms of the payback period? e. Determine the NPV for each of these projects. Should either project be accepted? f. Describe the logic behind the NPV. g. Determine the Pl for each of these projects. Should either project be accepted? h. Would you expect the NPV and Pl methods to give consistent accept/reject decisions? Why or why not? i. What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased? j. Determine the IRR for each project. Should either project be accepted? k. How does a change in the required rate of return affect the project's internal rate of return? I. What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better? (Click on the following icon in order to copy its contents into a spreadsheet.) To: New Financial Analysts From: Mr. V. Morrison, CEO, Caledonia Products Re: Capital-Budgeting Analysis Provide an evaluation of two propos shown in the popup window: : In evaluating these projects, please respond to the following questions: a. Why is the capital-budgeting process so important? b. Why is it difficult to find exceptionally profitable projects? c. What is the payback period on each project? If Caledonia imposes a 4-year maximum acceptable payback period, which of these projects should be accepted? d. What are the criticisms of the payback period? e. Determine the NPV for each of these projects. Should either project be accepted? f. Describe the logic behind the NPV. g. Determine the Pl for each of these projects. Should either project be accepted? h. Would you expect the NPV and Pl methods to give consistent accept/reject decisions? Why or why not? i. What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased? j. Determine the IRR for each project. Should either project be accepted? k. How does a change in the required rate of return affect the project's internal rate of return? I. What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better? (Click on the following icon in order to copy its contents into a spreadsheet.)
