investment decisions. The cash flows for both projects al a. Based on NPV, What projects would Apt be likely to invest in? b. Based on IRR, what projects woutd Heart be tikely to invest in? c. Which project has the fastest payback? Why might that be important to the investment decision?

investment decisions. The cash flows for both projects al a. Based on NPV, What projects would Apt be likely to invest in? b. Based on IRR, what projects woutd Heart be tikely to invest in? c. Which project has the fastest payback? Why might that be important to the investment decision?

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 13P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Alt
3. Both companies are considering an investment in Project One, Project
Two, and Project Three. All three projects carry an average amount of risk
for each company. Both companies use Payback, NPV and IRR to make
investment decisions. The cash flows for both projects are shown below.
a. Based on NPV, What projects would Apt be likely to invest in?
b. Based on IRR, what projects woutd Heart be tikety to invest in?
c. Which project has the fastest payback? Why might that be
important to the investment decision?
d. If money had no time value, which project would be the best
decision?
Project One: $10 million initial investment and $2million of free cash flow
at the end of each year for 15 years.
Project Two: $5 million initial investment. Free cash flows for 5 years :
Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million
Project Three: Initial investment of $20 million. One Free Cash flow of $40
million in 8 years. No other Free Cash Flows.

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