Posted: November 25th, 2022

**Problem Set on Capital Budgeting**

** 1.** Project K has a cost of $52,125, its expected net cash flows are $12,000 per year for 8 years, and its cost of capital is 12 percent.

** a. **According to the payback period criterion should the project be accepted?

** b.** According to the NPV criterion should the project be accepted?

** c.** According to the IRR criterion should the project be accepted?

** 2. **Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm’s cost of capital is 14 percent. After-tax cash flows, including depreciation, are $5,100 per year for five years for the truck and $7,500 per year for five years for the pulley. Calculate the IRR and the NPV for each project and indicate the correct accept/reject decision for each.

** 3. **Project S costs $15,000 and is expected to produce cash flows of $4,500 per year for 5 years. Project L costs $37,500 and is expected to produce cash flows of $11,100 per year for 5 years. Calculate the two projects’ NPVs and IRRs, assuming a cost of capital of 14 percent. Which project should be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?

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