A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0Year 1Year 2Year 3Year 4Year 5Project A-$6,000$2,000$2,000$2,000$2,000$2,000Project B-$18,000$5,600$5,600$5,600$5,600$5,600 a) Calculate NPV, payback, and discounted payback for each project.b) Assuming the projects are independent, which one(s) would you recommend?c) If the projects are mutually exclusive, which would you recommend?

Capital Budgeting:Capital budgeting is a business process in which the firms will evaluate the…

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Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16EA: Project B cost $5,000 and will generate after-tax net cash inflows of $500 in year one, $1,200 in...

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A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80%

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Project A	-$6,000	$2,000	$2,000	$2,000	$2,000	$2,000
Project B	-$18,000	$5,600	$5,600	$5,600	$5,600	$5,600

a) Calculate NPV, payback, and discounted payback for each project.
b) Assuming the projects are independent, which one(s) would you recommend?
c) If the projects are mutually exclusive, which would you recommend?

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