capital-budget-techniques

Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the project’s ability to earn the company additional compensation. The 3 main tools used to make this evaluation are the pay-back period, net present value (NPV), and internal rate of return (IRR).

Year

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Project #1

Project #2

Project #3

0

($30,000)

($32,000)

($35,000)

1

$11,000

$15,000

$11,000

2

$11,000

$14,000

$11,000

3

$11,000

$11,000

$11,000

4

$11,000

$2,000

$11,000

5

$11,000

$500

$11,000

Scenario

NPV Rate

1

5%

2

5.5%

3

6%

Using the data in the tables above, answer the following questions:

  • Calculate the NPV for each project using each scenario’s NPV rate. Show your work.
  • Calculate the pay-back period for each project. Show your work.
  • Calculate the IRR for each project. Show your work.
  • Which project would the company select using the NPV method in scenario 1? Explain your answer.
  • Which project would the company select using the NPV method in scenario 2? Explain your answer.
  • Which project would the company select using the NPV method in scenario 3? Explain your answer.
  • Which project would the company select using the pay-back period? Explain your answer.
  • Which project would the company select using the IRR method? Explain your answer.

Deliverable Length: 800–1,000 words

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