Suppose that you are working as a capital budgeting analyst in a finance department of a firm and you are going to evaluate two mutually exclusive projects by implementing different capital budgeting techniques. The cash flows for these two projects are given below. YEAR / CASH FLOW (A) /CASH FLOW (B) 0 -$17,000 -$17,000 1 8,000 2,000 2 7,000 5,000 3 5,000 9,000 4 3,000 9,500 a)The crossover point on NPV profile is 12.18%. Above that point which project should you accept? Explain the relevance of the crossover point. How should you convince your boss that the NPV method is the way to go when it is compared with IRR? In other words what are the shortcomings of IRR method? b)Calculate the Profitability Index for each proposal. Which project should you accept? Can this measure help to solve the dilemma? Explain. C) What can be the last decision? Why? Explain.
Suppose that you are working as a capital budgeting analyst in a finance department of a firm and you are going to evaluate two mutually exclusive projects by implementing different capital budgeting techniques. The cash flows for these two projects are given below.
YEAR / CASH FLOW (A) /CASH FLOW (B)
0 -$17,000 -$17,000
1 8,000 2,000
2 7,000 5,000
3 5,000 9,000
4 3,000 9,500
a)The crossover point on
b)Calculate the Profitability Index for each proposal. Which project should you accept? Can this measure help to solve the dilemma? Explain.
C) What can be the last decision? Why? Explain.
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