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Another company, Davis Industries is choosing between a gas-powered and an electric-powered forklift truck ...

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Finance

Another company, Davis Industries is choosing between a gas-powered and an electric-powered forklift truck
for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only
one i.e., they are mutually exclusive investments. The cost of capital is 10%. The director of capital budgeting
has provided the expected cash flows of the machines as follows:
f. Calculate the payback period and profitability index for each machine.
g. Calculate net present value (NPV) and internal rate of return (IRR) for each machine.
h. Using the NPV technique, which machine should be recommended?
The director of capital budgeting has asked you to include risk analysis in your report. He wants you to explain
risk in the context of capital budgeting, and how the risk can be analyzed.
i. Explain three types of risk that are relevant in capital budgeting decisions.
j. How is each of these risk types measured?
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