WebQuest

Lesson on Capital Budgeting

Conclusion

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Question 1

Thepresident of Georgetown Company is evaluating three investment projects. Thenet cash flows for each project are estimated as follows:

Investment Projects

 

A

B

C

Initial Cost

($212 508)

($227 448)

($217 180)

Year

1

$

90 000

$

60 000

$

50 000

2

90 000

60 000

50 000

3

90 000

60 000

50 000

4

 

60 000

50 000

5

 

60 000

50 000

6

 

 

50 000

7

 

 

50 000

8

 

 

50 000

 

Compute Each of the following:

i)                   The payback period for each investmentproject

ii)                 The net present value for Eachinvestment project

iii)               The profitability index for Eachinvestment project.

iv)               Rank the three investment projects basedon the three measures in (i-iii)   (CAPE2010)

Assignment must be completed in groups. Attach anaction plan outlining the task completed by each member.

 Solutions

Payback Period

Project A                     Project B                     ProjectC

212508                     227448                                  217180

90000                         60000                                  50000

 

2.3612 yrs                   3.7908yrs                   4.3436 yrs

 

.36123 x 12                 .7908x 12                   .3436 x 12

 

2 years 4 months         3years 8 months         4 years 4 months


Net Present Value

Assuming that annuity for the Net Present Value is10%

 ProjectA

Years

Cash Flow

Discount Factor

Present Value

0

(212,508)

 

(212,508)

1 to 3

90,000

2.4869

223,821

 

 

Net Present Value

11,313


Project B

Years

Cash Flow

Discount Factor

Present Value

0

(227,448)

 

(227,448)

1 to 5

60,000

3.7908

227,448

 

 

Net Present Value

0

Project C

Years

Cash Flow

Discount Factor

Present Value

0

(217,180)

 

(217,180)

1 to 8

50,000

5.3349

266,745

 

 

Net Present Value

49,565


Profitability Index 

                                                                             Projects

 

Profitability                             528,576                       862,208                       1158,640

                                                272,508                       227,448                       217180

 

                                                =2.49                           =3.79                           =5.3

 

Profitability Index                         Present Value ofFuture Cash Flow

                                                            InitialInvestment Required

Project A                                 270,000/212,508= 1.27

 Project B                                 300,000/227,448= 1.318

 Project C                                 400,000/217,180=  1.841

 

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