24. Smythe Company is considering the following 5 capital budgeting projects. Th

Question

24. Smythe Company is considering the following 5 capital budgeting projects. The cost of capital for all projects is 14%.

If the projects are INDEPENDENT, which project(s) should Smythe accept? (Note: it is possible that more than one project should be accepted.).

a. Project A

b. Project B

c. Project C

d.Project D

e.Project E

Please be correct! Showing how you got your answer will help the most!

Project Initial Cost NPV IRR PI A $1,000,000 ($650,000) 10% 0.96 B $400,000 $113,000 18% 1.33 C $10,000 $2,500 21% 1.52 D $2,500,000 $20 15% 1.01 E $8,350,000 $515,000 17% 1.44

Explanation / Answer

Solution :-

On the basis of NPV and PI following rankings are given in the table as under -

Conclusion :-

From the above table Project A is discarded as it has negative NPV. Also if we check the IRR of Project A is 10% which is less than cost of the project so if accepted will result in loss.

Smythe company should accept projects as per the rankings given -

Project C, Project E, Project B, Project D

Project NPV PI IRR Rankings based on PI A ($650,000) 0.96 10% Discard B $113,000 1.33 18% III C $2,500 1.52 21% I D $20 1.01 15% IV E $515,000 1.44 17% II

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