- Submitted By: bishop262003
- Date Submitted: 02/10/2009 6:02 PM
- Category: Business
- Words: 378
- Page: 2
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Problem 12a- The Project Payback Period represents the amount of time that it takes for a Capital Budgeting project to recover its initial cost. The numbers represented in the table are equivalent to Caladonia Products cash flow. Both projects start out with -100,000, yet project A consistently shows a $32,000 for the next five years. The payback period is formulated with the following : [pic]. With the NCF equaling the Net Cash Flow. Given those stats for Project A, the last year with a negative is year 1 so it would be -100,000/32,000=3.125, so the pay back period for project A is 3.12 years. Project B is a little more difficult because there is no cash flow listed in years 1-4, yet year 5 has a value of $200,000. Dividing the 4 missing years by 200,000 will give you an avg cash flow of $50,000. The last negative year produced $-100,000 divide that by $50,000 will give you -2. So the pay back period is 2 years for Project B.

12b-

The NPV is calculated as the present value of the project's cash inflows minus the present value of the project's cash outflows. This relationship is expressed by the following formula:

[pic] (zenwealth, 2008)

Both projects started with a -100,000. So using the above formula, Project A has a NPV of 18,268.7.

Project B, with using the estimated cash flow of 50,000 comes to a NPV of 84,794.85. Both of these problems used 11% return rate.

12c. Internal rate of return

The internal rate of return for project A is 10.661% while the internal rate of return for project B is 18.920%. Project A would be at just below the required 11% rate of return to go forward with the project but Project B goes above and beyond that with close to 19% and will be the company’s preference of a capital gains venture.

12d. Ranking Conflict

The cause of “ranking conflict” was generated by the estimated cash flow within project “B”

12e.

Project “B” would be the choice for 3 reasons

- Project B has a larger rate of return...

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