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    Capital Budgeting Decisions

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    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 ...

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