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Capital Budgeting Techniques

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16. Identify the decision rule for accepting or rejecting investment projects using NPV.
17. Give an example of mutually exclusive investment projects and explain how they affect the capital budgeting decision.

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Solution Summary

This explains the Net Present Value technique of appraising the projects through a case study. This also explains how to calculate NPV, Interest coverage ratio and Fixed payment coverage ratio.

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A NPV OF INVESTMENT USING FIRM'S COST OF CAPITAL

YEAR INVESTMENT A INVESTMENT B
0 -1000 -1000
1 600 700
2 600 600
3 600 500
4 600 400
COST OF CAPITAL 12%

NPV $822.41 $713.41
PREFERRED INVESTMENT WILL BE THE PROJECT HAVING HIGHER NPV I.e PROJECT A

A NPV OF INVESTMENT USING CERTAINTY ...

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