CAPITAL BUDGETING

1. Your company is considering two projects, M and N. Each of which requires an initial outlay of Br.240 million. The expected cash inflows from these projects are: Year Project M Project N 1 85 100 2 120 110 3 180 120 4 100 90 a. What is the payback period for each of the projects? b. What is the discounted payback period for each of the projects if the cost of capital is 15 percent? c. If the two projects are independent and the cost of capital is 15 percent, which project(s) should the firm invest in? d. If the two projects are mutually exclusive and the cost of capital is 12 percent, which project should the firm invest in? e. Calculate the IRR for each of the projects. Which project should the firm invest in, if the cost of capital is 14 percent and projects are mutually exclusive? 2. You are evaluating a project whose expected cash flows are as follows: Year 0 1 2 3 4 Cash flow -1,000,000 200,000 300,000 400,000 500,000

What is the NPV of the project (in '000s) if the discount rate is 10 percent for year 1 and rises thereafter by 2 percent every year? 3. The cash flows associated with an investment are given below: Year Cash flow 0 Br.(850,000) 1 120,000 2 450,000 3 360,000 4 210,000 5 130,000 Calculate the benefit cost ratio of this investment, if the discount rate is 12 percent. 4. If an equipment costs Br.350,000 and lasts 6 years, what should be the minimum annual cash inflow before it is worthwhile to purchase the equipment ? Assume that the cost of capital is 12 percent.