5. You are working with the CFO's office to help with capital budgeting and have been asked to evaluate 3 proposals for projects to improve the painting line in your factory. Of course, you could also decide to do nothing and invest capital budget funds in another area. Each project alternative has a different cashflow and you have calculated the following NPVs: • Project A has an NPV of -$47,000 • Project B has an NPV of -$11,500 Project C has an NPV of - $2,750 What recommendation will you give the CFO regarding these alternatives and why?

5. You are working with the CFO's office to help with capital budgeting and have been asked to evaluate 3 proposals for projects to improve the painting line in your factory. Of course, you could also decide to do nothing and invest capital budget funds in another area. Each project alternative has a different cashflow and you have calculated the following NPVs: • Project A has an NPV of -$47,000 • Project B has an NPV of -$11,500 Project C has an NPV of - $2,750 What recommendation will you give the CFO regarding these alternatives and why?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.4IP

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Define IRR method of capital budgeting. What are some of the problems associated with using IRR approach for mutually exclusive projects? Briefly explain with examples. How do managers deal with those problems?
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E1 Prior to the expansion, the Fountainbleau profits were $60m and the Eden Roc's profits were $25m. If the Fontainebleau completes the highrise expansion, their profits will increase by A. If the expansion is built and Eden Roc makes no changes, Eden Roc's profits will fall by B from the shadow cast on its pool area. Eden Roc can convert the shaded region of their property to a nightclub (which is unaffected by any shadow). In that case, Eden Roc will earn a total profit of C. Alternatively, the Fountainblue can demolish the expansion and instead put in two story condominiums which will not interfere with Eden Roc's sunlight, but then will only increase profit by D. Suppose that Eden Roc loses the lawsuit, and Fountainebleau is permitted to complete construction as it chooses. A) What will each party choose to do in the absence of bargaining? B) What will be the threat values? C) What is the cooperative surplus from bargaining? Enter zero if there is no cooperative surplus to…