A company is considering three capitalbudgeting projects. Data relative to each is given below. Eachproject has a life of 5 years. The company uses the Net PresentValue (NPV) method to evaluate capital budgeting projects and itsdiscount rate is 9%.
ProjectAÂ Â Â Â Â Â Â Â Â ProjectBÂ Â Â Â Â Â Â Â Â ProjectC
Initial cash outlay(cost)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â -$5,000,000Â Â Â Â Â -$6,000,000Â Â Â Â Â -$2,500,000
Cash inflows peryear                           $1,500,000    $1,800,000     $600,000
Residualvalue                                       $500,000              0                $100,000
- If the projects are mutually exclusive, which, if any, shouldthe company accept?  Why?
- If the projects are independent, which, if any, should thecompany accept?  Why?
- One of the company’s managers states “To me, no matter whatelse we do, Project C needs to be our first choice because it hasthe lowest initial cost of $2,500,000.â€Â  Comment on thismanager’s proposal, considering the concepts of NPV and PaybackMethod.
