DQ 1 - What are the important administrative considerations in the capital budgeting process?

 DQ 2 - Why does capital budgeting rely on the analysis of cash flows rather than net income?

 DQ 3 - What are the weaknesses of the Payback Method?

 DQ 4 - What is normally used as the discount rate in the Net Present Value method?

 Problems

 5  Assume a $50,000 investment with the following two cash flow alternatives.

 OPTION A OPTION B

 Year 1 $10,000 $20,000

 Year 2 $11,000 $25,000

 Year 3 $13,000 $15,000

 Year 4 $16,000 0

 Year 5 $30,000 0

 Which alternative would you select under the Payback Method?

 6  In problem 5, if the cash flow for year 5 of Option A was $30,000,000 instead of $30,000, would your answer change under the Payback Method?

 11  Home Security Systems is analyzing the purchase of a $40,000 piece of equipment. The cash flows generated will be:

 Year 1 $15,000

 Year 2 $20,000

 Year 3 $25,000

 Year 4 $10,000

 Year 5 $5,000

 What is the procject's Internal Rate of Return (approximate)?

 If the Cost of Capital is 12%, should the project be accepted?

 13  Hamilton COntrol Systems will invest $90,000 into a project that will generate the following cash flows:

 Year 1 $23,000

 Year 2 $38,000

 Year 3 $60,000

 At the end of three years, the company will incur a $15,000 cost to shut the project down.

 If the Cost of Capital is 10%, should the project be undertaken? (use the Net present Value method)

 15  Hudson Corporation is considering investing $14,400 into a project that will generate the following cash flows:

 Year 1 $7,000

 Year 2 $7,000

 Year 3 $4,000

 Assuming a cost of capital of 11%, what is the project's Net Present Value?

 What is the project's Internal rate of Return?

 Should you undertake the project?