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Help with capital budgeting methods?
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years.
Project L costs $25,000 and it expected to produce cash flows of $7,400 per year for 5 years.
Calculate the two projects NPV’s, IRR’s, MIRR’s and PI’s, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
3 Answers
- Anonymous1 decade agoFavorite Answer
Hi here are the results
-------Project S---Project L
NPV-----$814.33 ---$1,675.34
IRR------15.24%------14.67%
MIRR---13.77%------13.46%
PI--------1.08 ------1.07
PBP----3 yrs and 5 mo.---3 yrs and 5 mo.
DPBP--4 yrs and 7 mo.-- 4 yrs and 8 mo.
Even though the Projec L has a higher NPV doesn't mean we should accept L
The IRR and MIRR for Project S is higher than that of Project L thus making Project S more attractive
The Profitability Index for Project S is higher than that of Project L thus making project S more attractve
The discounted payback period for Project S is smaller than that of Project L thus making Project S more attractive
Source(s): I have removed my site content that I used to place as reference for these sort of questions as there was no ROI or return on investment having that site that catered to financiers yet made pennies in revenue - Anonymous1 decade ago
Refer to Financial Management, IM Pandey
- Anonymous5 years ago
complex stuff. do a search at yahoo or google. that can help!