Capital Budgeting Decisions

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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 ...