# Capital Budgeting Decisions

Make capital budgeting decisions utilizing various capital budgeting models.

1. Payback method

2. Net Present Value method

3. Internal Rate of Return method

Muscatel, Inc. is evaluating whether to build a bridge that will take two years to construct, or use a ferry to transport ore across a river. The cost of each alternative is a follows:

Bridge Ferry

Investment year 0 $4,000,000 $1,000,000

Annual revenue

Year 1 0 $750,000

Year 2 0 $750,000

Years 3-10 $1,500,000 $750,000

Annual operating cost $250,000 $100,000

Cost of capital 10% 10%

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Capital Budgeting Decisions

Make capital budgeting decisions utilizing various capital budgeting models.

1. Payback method

2. Net Present Value method

3. Internal Rate of Return method

Muscatel, Inc. is evaluating whether to build a bridge that will take two years to construct, or use a ferry to transport ore across a river. The cost of each alternative is a follows:

Bridge Ferry

Investment year 0 $4,000,000 $1,000,000

Annual revenue

Year 1 0 $750,000

Year 2 0 $750,000

Years 3-10 $1,500,000 $750,000

Annual operating cost $250,000 $100,000

Cost of capital 10% 10%

Bridge

Year 0 1 2 3 4 5 6 7 8 9 10

I. Investment Outlay

1. Capital Investments -4,000,000

2. Total net investment -4,000,000

II. Operating Cashflows over the Project's Life

3. Expected cash flow per year - - 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000

4. Annual Operating Cost - - 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000

5. Net Cash flow - - 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000

Payback period is defined as the expected number of years required to recover the original investment.

Period 0 1 2 3 4 5 6 7 8 9 10

Net cash flow -4,000,000 - - 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 ...

#### Solution Summary

This solution is comprised of a detailed explanation to evaluate the capital budgeting project.