A capital budgeting analyst for a company

Assignment Help Financial Accounting

Reference no: EM13936521

Suppose you are a capital budgeting analyst for a company considering investments in eight projects listed in Exhibit 1. The company has determined that they can undertake each of these projects and have forecasted the project cash flows from each project in Exhibit 1.

You will rank the projects based on quantitative decisions alone. No other project characteristics are relevant in the selection, except that management has determined that projects 5 and 6 are mutually exclusive. All other projects are independent.

All the projects require the same initial investment, $5 million. Moreover, all are believed to be of the same risk class. Assume that 12% is an appropriate discount rate (some officers of the company have suggested that the discount rate should be higher).

You will be assigned to calculate the following for 2 projects: NPV, IRR, MIRR, profitability index..

Assigned #1 and #2

Calculate the crossover point - the point at which the NPVs of #1 and 2 are the same. Looking at this discount rate and at the discount rate given in the case, how might this influence your decision about which project to accept?

As a manager choosing capital budgeting projects, which set of cash flows would you prefer and why?

Exhibit 1

Project Cash Flows (dollars in thousands)

Project:	1	2	3	4	5	6	7	8
Initial cost:	-5000	-5000	-5000	-5000	-5000	-5000	-5000	-5000
Year
1	650	3,000	0	700	2500	-550	670	625
2	650	1400	0	900	1700	-50	670	625
3	650	840	0	915	900	60	670	625
4	650	650	0	920	700	450	670	625
5	650	390	0	925	500	800	670	625
6	650	235	0	930	300	1100	670	625
7	650	141	0	940	200	1350	670	625
8	650	85	0	950	150	1500	670	625
9	650	51	0	960	100	1625	670	625
10	650	31	0	970	60	1725	670	625
11	650	19	0	980	30	1810	670	625
12	650	11	0	990	20	1885	670	625
13	650	7	0	1000	10	1935	670	625
14	650	4	0	1100	5	1975	670	625
15	5000	3	22000	-5000	5	2000	670	5625

Reference no: EM13936521

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