Capital Budgeting Decision Models

1 Capital Budgeting Decision Models
Case 1
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm’s cost of capital is 15 percent.
Using the net present value approach to ranking projects, which projects should the firm accept?
Project
Initial Investment
NPV
1
$200,000
$100,000
2
400,000
20,000
3
250,000
60,000
4
200,000
–5,000
5
150,000
50,000
6
400,000
150,000

Solution:

Case 2
Operating Cash Inflows
$1,000
$1,000
$1,000
$1,000
$1,000
$2,500(Initial outlay)

Given the information in Table and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?

Solution: