Capital Budgeting Homework Projects A and B are mutually exclusive projects. The

Question

Capital Budgeting Homework

Projects A and B are mutually exclusive projects. They have the following cash flows: Project A CF0 = -$16,000 Project B CF0 = $-16,000 Annual Cash flows: Year 1 +$9,500 Year 2 +$4,000 Year 3 +$5,200 Year 4 +$1,200 Year 5 +$ 900 Year 1 +$4,500 Year 2+$3,000 Year 3 +$3,500 Year 4 +$5,000 Year 5 +$7,000 Use increments of 2% in finding the profile (ie., 0%,2%.4%.etc.) out to 28%. From your profile, approximately what is the IRR of project A and the IRR of project B? If the required rate of return (r) is 7%, which project should you choose? CF0 negative $2,500 Year 1 positive $9,500 Year 2 negative $9,000 Year 3 positive $2,000 Year 4 negative $1,000 Do a NPV profile for this capital budgeting project. Use 12% increments out to 156% when finding the NPV profile Redo the NPV profile using 6% increments to find the IRR, what can you say about the approximate IRR?

Explanation / Answer

2 Year Project A Project B 0 -16000 -16000 1 9500 4500 2 4000 3000 3 5200 3500 4 1200 5000 5 900 7000 IRR 14% 12% 3 Project A Project B Required rate of return 7% 7% IRR 14% 12% Project A should be accepetd

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