Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations: (1) A new product line to enhance sales (2) Investment in Research and Development (R&D) which is also expected to boost sales. (3) Each project has an initial investment of $325,000. The company’s board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Year incremental Cash Inflows (CFt) New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project

Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations: (1) A new product line to enhance sales (2) Investment in Research and Development (R&D) which is also expected to boost sales. (3) Each project has an initial investment of $325,000. The company’s board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Year incremental Cash Inflows (CFt) New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 4P

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Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations: (1) A new product line to enhance sales (2) Investment in Research and Development (R&D) which is also expected to boost sales. (3) Each project has an initial investment of $325,000. The company’s board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Year incremental Cash Inflows (CFt) New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 1) Calculate the NPV of each project at discount rate of 9%, as well as the Internal Rate of Return of both projects and discuss the…
b) Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations, each with an initial investment of $325,000. 1) A new product line to enhance sales 2) Investment in Research and Development (R&D) which is also expected to boost sales. The company's board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Incremental Cash Inflows (CF) Year New Line R&D 1 $120,000 $100,000 120,000 115,000 3 120.000 125,000 4 120,000 140,000 i) Calculate the payback period for each project ii) Calculate the NPV of each project at discount rate of 9%. Please show workings. iii) Calculate the Internal Rate of Return of both projects and discuss the findings. (iv) What is your decision based on (i), (ii) and (iii) above? Will your decision change if the firm has capital rationing issues?
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