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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%.

Questions:
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:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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