Evaluating Capital Projects Mini-Case
Read the Evaluating Capital Projects Mini-Case
a. Write a 3 page memo answering the questions included in the Mini-Case.
b .Describe how 1 Chronicles 28 relates to the capital budgeting concepts included in the various questions.
Your MEMO should:
a. Answer the questions stated above (a&b).
b.Be at least 3 pages.
c.Use proper spelling, grammar, APA formatting, and include citations as appropriate.
The conference on evaluating capital projects has been very helpful. You have received a significant amount of information and multiple projects to evaluate to hone your skills. To adequately teach Grammy and the board you will need to answer several questions about the capital-budgeting process. You will do this in a business memo that is no more than four pages long.
Provide an evaluation of two proposed project, both with a 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to a highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows:
|Project A||Project B|
|Inflow year 1||20,000||40,000|
|Inflow year 2||30,000||40,000|
|Inflow year 3||40,000||40,000|
|Inflow year 4||50,000||40,000|
|Inflow year 5||70,000||40,000|
In evaluating these projects, please respond to the following question:
- Why is the capital-budgeting process so important?
- Why is it difficult to find exceptionally profitable projects?
- What is the payback period on each project? If the organization imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?
- What are the criticisms of the payback period?
- Determine the NPV for each of these projects. Should they be accepted?
- Describe the logic behind the
- Determine the PI for each of these projects. Should they be accepted?
- Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not?
- What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased?
- Determine the IRR for each project. Should they be accepted?
- How does a change in the required rate of return affect the project’s internal rate of return?
- What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?