b) Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations, each with an initial investment of $325,000. 1) A new product line to enhance sales 2) Investment in Research and Development (R&D) which is also expected to boost sales. The company's board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Incremental Cash Inflows (CF) Year New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project ii) Calculate the NPV of each project at discount rate of 9%. Please show workings. ii) Calculate the Internal Rate of Return of both projects and discuss the findings. (iv) What is your decision based on (i), (ii) and (iii) above? Will your decision change if the firm has capital rationing issues?

b) Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations, each with an initial investment of $325,000. 1) A new product line to enhance sales 2) Investment in Research and Development (R&D) which is also expected to boost sales. The company's board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Incremental Cash Inflows (CF) Year New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project ii) Calculate the NPV of each project at discount rate of 9%. Please show workings. ii) Calculate the Internal Rate of Return of both projects and discuss the findings. (iv) What is your decision based on (i), (ii) and (iii) above? Will your decision change if the firm has capital rationing issues?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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