Following is information about two mutually exclusive capital budgeting projects
ID: 2700642 • Letter: F
Question
Following is information about two mutually exclusive capital budgeting projects that a company is evaluating:
(a) which project(s) should be chosen? Explain why. (b) From the information give, what can be concluded about the company%u2019s required rate of return, r? (c) what can be concluded about the life o each project?
Capital Budgeting Technique
Project J
Project K
Net present Value
$10,200
$8,800
Internal Rate of Return
16.9%
18.9%
Traditional payback period
5.4 years
4.1 years
Discounted payback period
7.2 years
4.8 years
Show all work
Capital Budgeting Technique
Project J
Project K
Net present Value
$10,200
$8,800
Internal Rate of Return
16.9%
18.9%
Traditional payback period
5.4 years
4.1 years
Discounted payback period
7.2 years
4.8 years
Explanation / Answer
a) Either or both projects J and K can be chosen, since their NPV is positive. (i.e) more than zero.
b) The company's rate of return r will be less than 16.9 %
c) Since the payback period of K is less than Project J, according to payback period Project K will be preffered.