CAPTIAL BUDGETING1 of 5You are the finance manager for your company. Management has informed you that they are temporarily enforcing capital budgeting constraints on new projects.
Management has placed a capital budgeting constraint of $1,000,000 and a further constraint of only two projects (due to resourcing constraints). The available, indivisible projects have been analysed to find their Internal Rate of Return (IRR). The required rate of return for projects is 15% pa effective.
| Initial cost | IRR |
| Project 1 | $630,000 | 23.5% pa |
| Project 2 | $325,000 | 20.8% pa |
| Project 3 | $705,000 | 18.6% pa |
| Project 4 | $340,000 | 14.8% pa |
| Project 5 | $120,000 | 13.8% pa |
Select all the projects that you would implement:
| Project 1 |
| Project 2 |
| Project 3 |
| Project 4 |
| Project 5 |
2 of 5Consider the following cash flows for a new business venture:
| Time | Year0 | Year1 | Year2 |
| Cashflow($) | -1,450 | 780 | 770 |
- Calculate the NPV assuming investors require a return of 22% pa effective for ventures of this risk. Give your answer in dollars and cents to the nearest cent.
NPV = $
B) Indicate whether you would accept or reject this venture by selecting one of the following statements:
I would accept this investment
I would reject this investment
- Calculate the project's internal rate of return (IRR). You may give your answer as a percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result.
IRR = % pa
3 of 5Analyse the following mutually exclusive projects being considered by the Mean Corporation that each require an initial investment of $547,000. The applicable interest rate to discount the cash flows is the company's cost of capital which is 15% pa effective. The table shows the future cash flows associated with each project.
| Project | Year1 | Year2 | Year3 | Year4 |
| A | $225,000 | $225,000 | $225,000 | $225,000 |
| B | 0 | 0 | 0 | $1,094,000 |
- Calculate the net present value (NPVA) for Project A. Give your answer in dollars and cents to the nearest cent.
NPV
A = $
- Calculate the internal rate of return (IRRA) for Project A. You may give your answer as a percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result.
IRR
A = % pa
- Calculate the net present value (NPVB) for Project B. Give your answer in dollars and cents to the nearest cent.
NPV
B = $
- Calculate the internal rate of return (IRRB) for Project B. Give your answer as a percentage per annum to 3 decimal places.
IRR
B = % pa
- Which project(s) would you recommend?
None
Project A
Project B
Both
4 of 5The ARR method of capital budgeting relies on which figures for analysis?
| payback periods |
| book values |
| interest rates |
| cash flow figures |
5 of 5The projects set out below have been analysed using the payback period method of project evaluation. The target payback period has been set at 5 years.
Assuming that only the payback period method of project evaluation is used and that there is no limitation on available investment funds, select all the projects that would be accepted:
| Project | Payback period |
| Project 1 | 3 |
| Project 2 | 8 |
| Project 3 | 5 |
| Project 4 | 5 |
| Project 5 | 7 |