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Capital Budgeting Question

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Projected cash flows for the proposed Solar Energy ("SE") Project, with a four-year life, are:
1. Initial expenditure of $100,000 now.
2. Projected cash inflow of $40,000 at end-of-each-of-next-three-years.
3. Projected cash inflow of $140,000 at end-of-fourth-year.
Key inputs for three of the different capital budgeting criteria (in addition to the projected cash flows) are:
1. Maximum Payback Period of 2.0 years.
2. Discount Rate for net present value analysis of 15.0%.
3. Hurdle Rate for internal rate of return analysis of 15.0%.

A) What is the project's Payback period and should the project be accepted or rejected based on it?
B) What is the NPV for the proposed project and should it be accepted or rejected based on this criteria?
C) What is the IRR for the proposed project and should it be accepted or rejected based on this criteria?

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Solution Summary

The expert determines the project's payback period.The IRR for the proposed projects are determined.

Solution provided by:
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
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