Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital budgeting proposals Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital budgeting process This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital budgeting analysis department or are provided with remedial training Provide an evaluation of two proposed projects, both with 5 year expected lives and identical initial outlays of $110,000 Both of these projects involve additions to Caledonias highly successful Avalon product line, and as a result, the required rate of return on both projects has been established at 12 percent The expected free cash flows from each project are as follows PROJECT A PROJECT B Initial outlay ($110,000) ($110,000) Inflow year 1 20,000 40,000 Inflow year 2 30,000 40,000 Inflow year 3 40,000 40,000 Inflow year 4 50,000 40,000 Inflow year 5 70,000 40,000 In evaluating these projects, please respond to the following questions Why is the capital budgeting process so important Why is it difficult to find exceptionally profitable projects What is the payback period on each project If Caledonia imposes a 3 year maximum acceptable payback period, which of these projects should be accepted What are the criticisms of the payback period What is the discounted payback period of each project Should they be accepted if 3 year maximum is imposed Determine the NPV for each of these projects Should they be accepted Describe the logic behind the NPV Determine the PI for each of these projects Should they be accepted Determine the IRR for each project Should they be accepted What reinvestment rate assumptions are implicitly made by the NPV and IRR methods Which one is better Determine the MIRR for each project Should they be accepted What is the difference between MIRR and IRR and which one is better

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Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your

Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital-budgeting analysis department or are provided with remedial training.

Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to Caledonias highly successful Avalon product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows:

	PROJECT A	PROJECT B
Initial outlay	($110,000)	($110,000)
Inflow year 1	20,000	40,000
Inflow year 2	30,000	40,000
Inflow year 3	40,000	40,000
Inflow year 4	50,000	40,000
Inflow year 5	70,000	40,000

In evaluating these projects, please respond to the following questions:

Why is the capital-budgeting process so important?

Why is it difficult to find exceptionally profitable projects?

What is the payback period on each project? If Caledonia imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?

What are the criticisms of the payback period?

What is the discounted payback period of each project? Should they be accepted if 3-year maximum is imposed?

Determine the NPV for each of these projects. Should they be accepted?

Describe the logic behind the NPV.

Determine the PI for each of these projects. Should they be accepted?

Determine the IRR for each project. Should they be accepted?

What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?

Determine the MIRR for each project. Should they be accepted?

What is the difference between MIRR and IRR and which one is better?