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"Education is the most powerful weapon which you can use to change the world”
– Nelson Mandela

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Assignment Capital Budgeting Decisions

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Q Assignment: Capital Budgeting Decisions Your company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years. Time 0 1 2 3 4 5 6 Cash Flow $(10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 Questions Evaluate the project using each of the following methods. For each method, should the project be accepted or rejected? Justify your answer based on the method used to evaluate the project’s cash flows.

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1. Payback period Total investment in Period 0 = $10000 Total returns in 3 years = 2400 + 4800 + 3200 = $10400 In light of the fact that the return in three years will be more than the initial investment, the proposal for the project will be approved. 2. Internal Rate of Return (IRR) Time 0 1 2 3 4 5 6 Cash Flow ($10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 IRR 23% The IRR of the project is 23% as shown in the above table, so according to the IRR the project would be accepted.