1015 Words5 Pages

Caladonia Products Integrative Problem
FIN/370
May 21, 2011
Caladonia Products Integrative Problem
Capital budgeting in corporations is the method that rejuvenates and revitalizes itself ,by adjusting previous projects to the present and discovering new ones ( Keown, Martin, Petty, & Scott, 2005). The method entails how a corporation determines whether projects such as building a new plant or investing in a long-term investment are of value (Capital Budgeting, n.d.). Often potential project's lifetime cash inflows and outflows are evaluated in order to decide whether the returns created meet an adequate target measure (Capital Budgeting, n.d.). The subject of this assignment is to prepare calculations and a response to Caladonia Products Integrative Problem. The methods used in this assignment are the payback period, NPV, IRR, and describing factors if Caladonia Products were doing a lease versus a buy will also be considered.
12a-12e. Caladonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:
Year Project A Project B
0 -$100,000 -$100,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 $200,000
The required rate of return of these projects is 11%.
Payback Period
Payback period is a capital budgeting criterion measure, which promptly provides the number of years the project will return is original investment (Keown, Martin, Petty, & Scott, 2005, p.292). a. What is each project’s payback period? Project A 100000/32000= 3.125 years
Project A’s payback period is 3.125 years.
Project B’s payback period is 4.5 years.
Net Present Value “The net present value (NPV) is a capital-budget decision criterion defined as the present value of the free cash flows after tax less the project’s initial outlay”

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