Principles of Managerial Finance

CHAPTER 9 Capital Budgeting Techniques 417

LG2 LG3

LG4

under consideration. The relevant cash flows associated with each are shown in

the following table. The firm’s cost of capital is 15%.

a. Calculate the net present value (NPV) of each press.

b. Using NPV, evaluate the acceptability of each press.

c. Rank the presses from best to worst using NPV.

9–10 Payback and NPV Neil Corporation has three projects under consideration.

The cash flows for each of them are shown in the following table. The firm has a

16% cost of capital.

a. Calculate each project’s payback period. Which project is preferred according

to this method?

b. Calculate each project’s net present value (NPV). Which project is preferred

according to this method?

c. Comment on your findings in parts aand b,and recommend the best project.

Explain your recommendation.

9–11 Internal rate of return For each of the projects shown in the following table, cal-

culate the internal rate of return (IRR). Then indicate, for each project, the maxi-

mum cost of capital that the firm could have and still find the IRR acceptable.

Project A Project B Project C

Initial investment (CF 0 ) $40,000 $40,000 $40,000

Year (t) Cash inflows (CFt)

1 $13,000 $ 7,000 $19,000

2 13,000 10,000 16,000

3 13,000 13,000 13,000

4 13,000 16,000 10,000

5 13,000 19,000 7,000

Press A Press B Press C

Initial investment (CF 0 ) $85,000 $60,000 $130,000

Year (t) Cash inflows (CFt)

1 $18,000 $12,000 $50,000

2 18,000 14,000 30,000

3 18,000 16,000 20,000

4 18,000 18,000 20,000

5 18,000 20,000 20,000

6 18,000 25,000 30,000

7 18,000 — 40,000

8 18,000 — 50,000