Following is information about two mutually exclusive capital budgeting projects
ID: 2700728 • Letter: F
Question
Following is information about two mutually exclusive capital budgeting projects that a company is evaluating
:
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 Periof 7.2 years 4.8 years
1. Which projects should be chosen? Explain why?
2. From the information given, what can be concluded about the company's required rate of return, r?
3. What can be concluded about the life of each project?
Explanation / Answer
1
Project J shoukd be chosen as it gives a higher NPV.
We can safely say that the company deals in high risk projects, and requires high rare of return.
The duration of the projects is medium-term. But, we can assume on viewing the discounted payback period that Project J's duration is longer than Project K.