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Capital Budgeting and Prospective Cash Inflows

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The following table shows two schedules of prospective operating cash inflows, each of which requires the same net initial investment of $10,000 now:

Annual Cash Inflows

Year_________Plan A________Plan B

1____________$1,000________$5,000

2_____________2,000_________4,000

3_____________3,000_________3,000

4_____________4,000_________2,000

5_____________5,000_________1,000

Total_______$15,000_______$15,000

The required rate of return is 6% annually. All cash inflows occur at the end of each year. In terms of net present value, which plan is more desirable? Show your computations.

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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