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For each project, calculate the NPV, IRR, profitability index (PI) and the payback period
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: The venture capital folks, when considering payback period, have a firm maximum payback period of four years. This 4-year payback period has no impact on other capital budgeting analysis techniques, each is to be considered on its own. In other words, yes, all cash flows need to be considered for NPV, IRR, and PI.
Project A Interest rate 12.80%
Project B interest rate is 14.30%
Project C interest rate is 10.55%
Project D interest rate is 8.30%
Expected cash flows for the four potential projects that Belfry is considering as shown below:
Years Project A Project B Project C Project D
0 -$8,750,000 -8,000,000 -5,500,000 -5,575,000
1 2,500,000 2,000,000 2,000,000 1,500,000
2 2,500,000 2,000,000 1,500,000 1,500,000
3 2,000,000 2,000,000 1,500,000 1,000,000
4 2,000,000 1,500,000 1,500,000 1,000,000
5 1,500,000 1,200,000 1,000,000 1,000,000
6 1,500,000 1,200,000 1,000,000
7 1,500,000 1,200,000 500,000
8 500,000 500,000
9 250,000
10 250,000
Expert Solution
Project A should be accepted as NPV is positive, IRR is greater than Interest Rate, PI is greater than 1 and Payback Period is less than maximum allowable period.
Project B should not be accepted as NPV is negative, IRR is less than Interest Rate, PI is lower than 1 and Payback Period is greater than maximum allowable period.
Project C should be accepted as NPV is positive, IRR is greater than Interest Rate, PI is greater than 1 and Payback Period is less than maximum allowable period.
Project D should not be accepted as NPV is negative, IRR is less than Interest Rate, PI is lower than 1 and Payback Period is greater than maximum allowable period.
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