1. Your company (Apple Inc) is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.
2. Your company (Apple Inc) is considering the construction of a new building. The building will have an initial cash outlay of $7 million, and will produce cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and $2 million at the end of years 3 through 5.
What is the internal rate of return on this new building? Would you recommend the company proceed with the construction? Why or why not?
3. Your company ( Apple Inc) is considering two mutually-exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years.
Project A will produce expected cash flows of $5,000 per year for years 1 through 5, whereas project B will produce expected cash flows of $6,000 per year for years 1 through 5. Because project B is the riskier of the two projects, management has decided to apply a required rate of return of 15 percent to its evaluation but only a 12 percent required rate of return to project A.
Discuss each project’s risk-adjusted net present value.