Professional Documents
Culture Documents
Explain the role of capital budgeting techniques in the capital budgeting process.
Calculate, interpret and evaluate payback period, net present value, profitability index
and internal rate of return.
9-1
9-2
The treasurer of Anthony Press. has projected the cash flows of projects A, B, and C
as follows. The required rate of return on both projects is 12 %.
Year
0
1
2
Project A
(RM100,000)
70,000
70,000
Project B
Project C
(RM200,000) (RM100,000)
130,000
75,000
130,000
60,000
c. Suppose these three projects are independent. Which project (s) should
Anthony accept based on the profitability index rule?
9-3
Year
Cash Flows
Cumulative
1
0
1
2
3
4
5
6
7
8
9
10
9-4
(RM)
(250,000)
(100,000)
(50,000)
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
(250,000)
(350,000)
(400,000)
(310,000)
(220,000)
(130,000)
(40,000)
50,000
9-5
Project A
Project B
-$50,000
-$40,000
+20,000
+20,000
+20,000
+10,000
+10,000
+5,000
2
+5,000
+40,000
+5,000
+40,000
Valley uses a combination of the net present value approach and the payback
approach to evaluate investment alternatives. It requires that all projects have a
positive net present value when cash flows are discounted at 10 percent and that all
projects have a payback period no longer than 3 years. Which project or projects
should the firm accept? Why?