A company is considering three capital budgeting projects. Data relative to each is given below. Each project...

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Finance

A company is considering three capitalbudgeting projects. Data relative to each is given below. Eachproject has a life of 5 years. The company uses the Net PresentValue (NPV) method to evaluate capital budgeting projects and itsdiscount rate is 9%.
ProjectAÂ Â Â Â Â Â Â Â Â ProjectBÂ Â Â Â Â Â Â Â Â ProjectC
Initial cash outlay(cost)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â -$5,000,000Â Â Â Â Â -$6,000,000Â Â Â Â Â -$2,500,000
Cash inflows peryearÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $1,500,000Â Â Â Â $1,800,000Â Â Â Â Â $600,000
ResidualvalueÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $500,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $100,000
If the projects are mutually exclusive, which, if any, shouldthe company accept?Â Â Why?
If the projects are independent, which, if any, should thecompany accept?Â Â Why?
One of the companyâ€™s managers states â€œTo me, no matter whatelse we do, Project C needs to be our first choice because it hasthe lowest initial cost of $2,500,000.â€Â Â Comment on thismanagerâ€™s proposal, considering the concepts of NPV and PaybackMethod.

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4.3 Ratings (704 Votes)

CALCULATION OF NPV Project A Project B Project C Initial cost 5000000 6000000 2500000 Cash inflows per year 1500000 1800000 600000 Residual value 500000 100000 PVIFA95 388965 See Answer

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