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BASICS OF CAPITAL BUDGETING SLP 5

Pearland Medical Center is considering two proposed capital investment opportunities, Project A and Project B. Each project requires a net investment of $100,000. The cost of capital for each project is 12 percent. The projects’ expected cash revenues are: Year Project A Project B 0 ($100,000) ($100,000) 1 $62,500 $32,625 2 $30,000 $32,625 3 $28,000 $32,625 4 $10,000 $32,625 Calculate each project’s payback period, net present value, and internal rate of return. Explain which project is financially acceptable. Avery, Flaherty, and Rhee (2011) noted that when choosing a capital budgeting decision tool, academics recommend NPV as the primary approach followed by IRR. The payback period method is also presented but is treated as a decision aid. If the payback period method is inferior relative to NPV, why are firms still using it as a primary decision tool? Based upon what you have read in this article and your other research, do you agree with the statement that payback period has little practical relevance? Explain your answer.
Pearland Medical Center is considering two proposed capital investment opportunities, Project A and Project B. Each project requires a net investment of $100,000. The cost of capital for each project is 12 percent.
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Assignment ID
32362
Discipline
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CREATED ON
June 20, 2016
COMPLETED ON
June 22, 2016
Price
$40
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