Explore BrainMass

Capital Budgeting

I'm having problems with this problem. I'm getting the same response for both process A and B.

Eagle Feather Company is considering investing in a new process which would improve manufacturing efficiency in the production of its principal product. The company can either invest in Process A for $150,000 which is easy to install and immediately begins to return cash back to the company, or Process B for $250,000 which is much more difficult to install but has the potential of returning greater cash flows in improved efficiencies. The after tax cash flows of the new processes are as follows:

Process A Process B

Initial Investment -$150,000 -$250,000

Year 1 $ 45,000 $ 25,000
Year 2 $ 55,000 $ 45,000
Year 3 $ 65,000 $125,000
Year 4 $ 75,000 $150,000
Year 5 $ 85,000 $175,000

a. If the company's Cost of Capital is 13%, what is the Payback, Net Present Value, and Profitability Index for each of these projects?

b. The Controller has calculated that the Internal Rate of Return on Project A is 29% and on Project B is 22%. She wants to undertake Project A. What do you recommend based on your analysis?

Solution Summary

The solution explains how to calculate Payback, Net Present Value, and Profitability Index for the given projects and make the acceptance/rejection decision based on IRR