# Lesson on Capital Budgeting

#### Conclusion

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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