Question
Valuing Capital Investment Mulbah Corporation has $40 million that it can invest in any or all of the four capital investment projects, which have cash
Valuing Capital Investment
Mulbah Corporation has $40 million that it can invest in any or all of the four capital investment projects, which have cash flows as shown below.
Year of Cash Flow | |||||
Project | Types of Cash Flow | Year 0 | Year 1 | Year 2 | Year 3 |
A | Investment Revenue Operating expenses | ($10,000)
|
$21,000 $11,00 | ||
B | Investment Revenue Operating expenses | ($10,000)
|
$15,000 $5,833 |
$17,000 $7,833 | |
C | Investment Revenue Operating expenses | ($10,000)
| $10,000 $5,555 | $10,000 $5,555 | $30,000 $15,555 |
D | Investment Revenue Operating expenses | ($10,000)
| $30,000 $15,555 | $10,000 $5,555 | $5,000 $2,222 |
All revenues and operating expenses can be considered cash items. |
Each of these projects is considered to be of equivalent risk. The investment will be depreciated to zero on a straight-line basis for tax purposes. Mulbahs corporate tax rate on taxable income is 40%. None of the projects will have any salvage value at the end of their respective lives. For purposes of analysis, it should be assumed that all cash flows occur at the end of the year in question.
1. Rank Mulbahs corporation four projects according to the following four commonly used capital budgeting criteria:
a) Payback period.
b) Accounting return on investment.
c) Internal rate of return.
d) Net present value, assuming alternately a 10% discount rate and a 35% discount rate.
2. Why do the ranking differ? What does each technique measure and what assumptions does it make?
3. If the projects are independent of each other, which should be accepted? If they are mutually exclusive (i.e., one and only one can be accepted), which one is best?
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