Brunko Hospitality Investment Associates have been approached to evaluate a set of capital budgeting projects. The expected net cash flows along with the initial outlays are represented in the data table below: Year Project 1 Project 2 0 -$250,000 -$250,000 1 $0 $120,000 2 $0 $120,000 3 $0 $120,000 4 $0 $120,000 5 $900,000 $120,000 This firm would like to evaluate the set of capital budgeting projects based on the NPV and IRR. If the minimum required rate of return is 13.00% for both of the projects, which project seems like a better investment to undertake?

Brunko Hospitality Investment Associates have been approached to evaluate a set of capital budgeting projects. The expected net cash flows along with the initial outlays are represented in the data table below: Year Project 1 Project 2 0 -$250,000 -$250,000 1 $0 $120,000 2 $0 $120,000 3 $0 $120,000 4 $0 $120,000 5 $900,000 $120,000 This firm would like to evaluate the set of capital budgeting projects based on the NPV and IRR. If the minimum required rate of return is 13.00% for both of the projects, which project seems like a better investment to undertake?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 3TP: Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%?...

See similar textbooks

Similar questions

Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%? Explain your answer. The following are independent situations. For each capital budgeting project, indicate whether management should accept or reject the project and list a brief reason why.
Appelbaum Inc. is comparing several alternative capital budgeting projects as shown below: Projects A B C Initial investment $80,000 $120,000 $160,000 Present value of net cash flows 90,000 110,000 200,000 Using the net present value, how many of the projects are available?? Group of answer choices
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12% for both projects. The projects’ expected net cash flows are as follows: Expected Net cash flows Year Project X Project Y 0 -10000 -10000 1 6350 3600 2 2988 3700 3 3145 3500 4 945 3500 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI)
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 −$10,000 −$10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e. Why does the conflict exist?
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y -S10,000 -$10,000 6,500 3,500 3,000 3,500 3,500 3,500 3,000 1,000 a. Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive?
Winant Inc. is comparing several alternative capital budgeting projects as shown below: Projects A B C Initial investment $80,000 $120,000 $160,000 Present value of net cash flows 90,000 110,000 200,000 Rank the projects in order of highest to lowest according to their profitability index.
The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Blue Moose Home Builders is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 Year 4 $500,000 $500,000 Blue Moose Home Builders uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places) 0.5731 0.6335 0.6033 O 0.7240 Blue Moose Home Builders's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the NPV of this project is in the project because the project A project with a negative NPV will have a PI that is . On the basis of this evaluation criterion, Blue Moose Home…
You are a financial analyst for the H Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12 percent. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y ($100,000) ($100,000) 60,500 40,000 30,000 40,000 30,000 40,000 10,000 40,000 Required: Calculate each project’s payback period, net present value (NPV) and Profitability Index (PI) Which project or projects should be accepted if they are independent? Which project should be accepted if they are mutually exclusive?
Blue Spruce Inc. is comparing several alternative capital budgeting projects as shown below: Initial investment Present value of net cash flows O C.B.A OA.C.B. OC.A.B. OAB.C. A Save for Later $102000 112000 Using the profitability index, the projects rank as Projects B $142000 $182000 222000 132000 C & Attempts: 0 of 1 used Submit Answer PriSc
You are a financial analyst for the Vincenzo Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 ($10,000) ($10,000) 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). Which project or projects should be accepted if they are…
Your company wants to determine the feasibility of two capital budgeting projects, and has given you the task of analyzing them. Because the projects are at the early "idea" stage, they are referred to simply as Project A and Project B. Each project has a cost of $50.000. and a cost of capital of 12%. Their expected net cash flows are: Expected Net Cash Flows Year Project A (S) Project B (S) (50.000) (50.000) 26,500 18,500 18.000 17.500 3. 12,000 15,500 4 7.000 15,500 (a) Calculate each project's payback period, (b) Calculate each project's net present value (NPV) (c) Calculate each project's internal rate of return (IRR). (d) Which project(s) should be accepted if they are independent? (e) Which project should be accepted if they are mutually exclusive?
Suppose a company has the following three projects and limits its capital budget to $50000. Projects Present Value of Cash Inflows Initial Investment A $40000 $25000 В 37500 25000 70000 50000 1. Calculate the projects' net present values (NPVS). 2. Calculate the projects' profitability indexes (PIs). 3. Which project(s) should the company choose? Why?