Which projects should be purchased if they are independent

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Reference no: EM133616770

Problem

Following are the net cash flow estimates for two capital budgeting projects:

              Expected Net Cash Flows
Year         Project F           Project N
0             (450,000)         (450,000)
1             45,000             315,000
2             270,000           135,000
3             358,110           164,645

The company's required rate of return is 12 percent. You must determine which, if any, of the projects should be purchased.

Question A. For each project, compute the (1) traditional payback period (PB), (2) discounted payback period (DPB), (3) net present value (NPV), and (4) internal rate of return (IRR). These computations can be completed using either a financial calculator or a spreadsheet. If you use a financial calculator, you must show all your work to receive full credit. If you use a spreadsheet, you should use the functions that are built into the spreadsheet, and you must submit a spreadsheet that shows the computations/functions in the cells where the results appear.

Question B. Which project(s) should be purchased if they are independent? Which project(s) should be purchased if they are mutually exclusive? Explain why you selected the project(s) in each case.

Question C. Would the NPVs change if the firm's required rate of return changed from 12 percent to 14 percent?

Question D. Would the projects' IRRs change if the required rate of return changed from 12 percent to 14 percent?

Question E. Using a spreadsheet, such as Excel, construct the NPV profile for Project F. In no more than three sentences, explain what information the NPV profile provides to decision makers.

Reference no: EM133616770

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