Question
You have a $10 million capital budget and must make the decision about which investments your firm should accept for the coming year. Use the
You have a $10 million capital budget and must make the decision about which investments your firm should accept for the coming year. Use the following information on three mutually exclusive projects to determine which investment your firm should accept. The firms cost of capital is 12%
|
| Project 1 | Project 2 | Project 3 | ||
| Initial cash outflow | -$ 4 000 000 | -$ 5 000 000 | -$ 10 000 000 | ||
| Year 1 cash inflow | 1 000 000 | 2 000 000 | 4 000 000 | ||
| Year 2 cash inflow | 2 000 000 | 3 000 000 | 6 000 000 | ||
| Year 3 cash inflow | 3 000 000 | 3 000 000 | 5 000 000 | ||
a. Which project do you accept on the basis of NPV? [3]
b. Which project do you accept on the basis of PI? [3]
c. If these are the only investments available, which one do you select? [3]
d. Now assume that another independent project is available to you. This new project has a cost of $5 million, with an NPV of $1.5 million. Given the availability of this new project, which of the mutually exclusive projects do you accept? [3]
e. Is the NPV or PI the better technique in the situation described in part (d)? Why? [3]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered 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