# Create a Capital Budgeting Problem

This question required that a capital budgeting question to be created and a solution provided for it. The question involved a long-term project that a company is considering investing in. The solution uses two capital budgeting methods, the Payback period method and the Net Present Value method, to come to a decision about whether the firm should invest in the project.

PAYBACK PERIOD METHOD AND NET PRESENT VALUE METHODS OF CAPITAL BUDGETING DEMONSTRATED

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## SOLUTION This solution is **FREE** courtesy of BrainMass!

THE PROBLEM:

A company whose cost of capital is 10% is considering investment in two projects. The cash flow for each project is as follows:

Project A

Initial Cash outflow $100,000

Cash Inflow:

Year 1 - $50,000

Year 2 - $40,000

Year 3 - $30,000

Project B

Initial Cash Outflow - $100,000

Cash Inflow:

Year 1 - $30,000

Year 2 - $40,000

Year 3 - $50,000

Required:

Determine which project is better for the firm using:

a. The payback period method

b. The net present value method

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