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Capital Budgeting and Investment Decisions

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What types of decisions would need to be made before the investment is made, and what are the main kinds of information/data needed in order to evaluate a capital investment project?

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The capital investment project has to be first evaluated from the perspective of return on the investment. Various capital budgeting techniques, such as Net Present Value (NPV), Internal Rate of Return (IRR) analysis, or payback period analysis, can be done to evaluate the ...

Solution Summary

Discusses decisions pertaining to capital budgeting investments and the types of data needed for making such decisions.

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Capital Budgeting Investment Decisions

A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash inflows of each are as follows:

Cash Inflows
A B C
YEAR 1 395 0 1241
YEAR 2 395 0 0
YEAR 3 395 0 0
YEAR 4 0 1749 0

Each investment requires a $1,000 cash outlay, and investment B and C are mutually exclusive.
(a) Which investment(s) should the firm make according to the net present values? Why?
(b) Which investments(s) should the firm make according to the internal rates of return? Why?
(c) If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

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