Growth Enterprises, Inc.

(GEI) has $40 million that it can invest in any or all of the four capital investment
projects, which have cash flows as shown in Table A below.

Type of
Project Type of Cash Flow Year 0 Year 1 Year 2 Year 3
A Investment (10,000)
Revenue 21,000
Operationg Expenses 11,000

B Investment (10,000)
Revenue 15,000 17,000
Operationg Expenses 5,833 7,833

C Investment (10,000)
Revenue 10,000 11,000 30,000
Operationg Expenses 5,555 4,889 15,555

D Investment (10,000)
Revenue 30,000 10,000 5,000
Operationg Expenses 15,555 5,555 2,222

Each of the projets is considered to be of equivalent risk. The investment will be depreciated to zero on a straight-lin
GEI's marginal corporate tax rate on taxable income is 40%. None of the projects will have any salvage value at the
For purposes of analysis, it should be assumend that all cash flows occur at the end of the yeat in question.

A Rank GEI's four projects according to the following four commonly used capital budget criteria:
1) Payback period
2) Accounting return on investment. For purposes of this exercies, the accounting return onn inv
Average annual after-tax profits
(required investment)/2

3) Internal rate of Return

4) Net Presenst value, assuming alternately a 10% discount rate and a 35% discount rate

B Why do the ranking differ? What does each technique measure and what assumptions does it ma

C If the projects are independent of each other, which should be accepted? If they are mutally exclu
capital investment

ated to zero on a straight-line basis for tax purpose.

ve any salvage value at the end of their respect lives.
e yeat in question.

used capital budget criteria:

e accounting return onn investment should be defined as follows:

a 35% discount rate

what assumptions does it make?

ed? If they are mutally exclusive (i.e one and only one can be accepted), which one is the best?