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Capital Budgeting Analysis

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Year Project A Project B
0 -$250,000 -$400,000
1 $100,000 $50,000
2 $80,000 $70,000
3 $60,000 $80,000
4 $40,000 $120,000
5 $20,000 $200,000

The above are two mutually exclusive investment projects for Rebel Alliance. The Alliance requires getting their invested amount fully paid back within 5 years. The Alliance's cost of capital (i.e., the required return on investment) is 6% annually.

Based on the Payback rule, what project(s) should the Alliance accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.

Based on the NPV rule, what project(s) should the Alliance accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.

Based on the IRR rule, what project(s) should the Alliance accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.

Based on your answers to Q8-10, what project(s) should the Alliance accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.

At what discount rate would the Alliance be indifferent between the two projects?
a. 4%.
b. 5%.
c. 6%.
d. 7%
e. 8%.

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Solution Summary

The solution includes a word document as well as an excel sheet to show detailed calculations of the problem requirements. It shows a comparative analysis of two mutually exclusive projects; comparing their net present values, internal rates of return, payback periods, as well as an NPV profile.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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