Another company, Davis Industries is choosing between a gaspowered and an electricpowered forklift truck
for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only
one ie they are mutually exclusive investments. The cost of capital is The director of capital budgeting
has provided the expected cash flows of the machines as follows:
f Calculate the payback period and profitability index for each machine.
g Calculate net present value NPV and internal rate of return IRR for each machine.
h Using the NPV technique, which machine should be recommended?
The director of capital budgeting has asked you to include risk analysis in your report. He wants you to explain
risk in the context of capital budgeting, and how the risk can be analyzed.
i Explain three types of risk that are relevant in capital budgeting decisions.
j How is each of these risk types measured?
