Given the information below, John the CEO needs to make the capital budgeting decision. Which project(s) is (are) most likely to be accepted, if the company's investment budget is 3/ million and the required rate of return is 8%?
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- . Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. 1. List and explain three (3) of these factors. 2. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? 3. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? 4. With practical example(s), differentiate between compounding and discounting. 5. As a Business Finance student, what is the essence of the valuation principle in your personal life?You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 −$10,000 −$10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e. Why does the conflict exist?a. Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. List and explain three (3) of these factors. b. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? c. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? d. With practical example(s), differentiate between compounding and discounting. e. As a Business Finance student, what is the essence of the valuation principle in your personal life?
- You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Which project should be accepted if they are mutually exclusive?You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Calculate each project’s modified internal rate of return (MIRR), and profitability index (PI).You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). Which project will you select if your decision was based solely on the project’s payback period? Which project or projects should be accepted if they are independent? Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and…
- You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Which project or projects should be accepted if they are independent?You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 Which project will you select if your decision was based solely on the project’s payback period?
- You are a financial analyst for the H Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12 percent. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y ($100,000) ($100,000) 60,500 40,000 30,000 40,000 30,000 40,000 10,000 40,000 Required: Calculate each project’s payback period, net present value (NPV) and Profitability Index (PI) Which project or projects should be accepted if they are independent? Which project should be accepted if they are mutually exclusive?You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below. Expected Net Cash Flows Year Project X Project Y 0 – $10,000 – $10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Which project or projects should be accepted if they are independent? Which project or projects should be accepted if they are mutually exclusive?You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y -S10,000 -$10,000 6,500 3,500 3,000 3,500 3,500 3,500 3,000 1,000 a. Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive?