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Year Project A Project B Project C Project D 0 -$4,000,000 -$8,000,000 -$6,000,000 -$3,000,000 1 $1,000,000 $1,250,000 $1,500,000 $300,000 2 $1,000,000 $1,250,000 $1,500,000 $500,000 3 $1,000,000 $1,250,000 $2,500,000 $500,000 4 $1,000,000 $1,250,000 $2,500,000 $750,000 5 $800,00 $1,250,000 $750,000 6 $0 $1,250,000 $750,000 7 $800,000 $1,250,000 $750,000 8 $300,000 $1,250,000 $750,000 9 $1,250,000 $750,000 10 $1,250,000 $750,000 Req rate of return is as below for Project A, B, C and D respectively
Year Project A Project B Project C Project D
0 -$4,000,000 -$8,000,000 -$6,000,000 -$3,000,000
1 $1,000,000 $1,250,000 $1,500,000 $300,000
2 $1,000,000 $1,250,000 $1,500,000 $500,000
3 $1,000,000 $1,250,000 $2,500,000 $500,000
4 $1,000,000 $1,250,000 $2,500,000 $750,000
5 $800,00 $1,250,000 $750,000
6 $0 $1,250,000 $750,000
7 $800,000 $1,250,000 $750,000
8 $300,000 $1,250,000 $750,000
9 $1,250,000 $750,000
10 $1,250,000 $750,000
Req rate of return is as below for Project A, B, C and D respectively.
A=11.58%
B=8.48%
C=10.03%
D=13.90%
For each project, calculate the NPV, IRR, profitability index (PI) and the payback period. For each capital budgeting decision tool, indicate if the project should be accepted or rejected, assuming that each project is independent of the others. Important Note: All projects must be completed within 6 years or less
Expert Solution
Project A should be accepted as NPV is positive, IRR is greater than required rate of rerturn, Payback Period is within 6 years and PI is greater than 1.
Project B should not be accepted as Payback Period is greater than maximum payable period.
Project C should be accepted as NPV is positive, IRR is greater than required rate of rerturn, Payback Period is within 6 years and PI is greater than 1.
Project D should be accepted as NPV is positive, IRR is greater than required rate of rerturn, Payback Period is within 6 years and PI is greater than 1.
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