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Capital Budgeting Decisions Utilizing Various Capital Budgeting Models

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%

Solution Summary

Using the payback method, net present value method, and internal rate of return method, this solution is computed in Excel and makes capital budgeting decisions based on the data.