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Capital Budgeting and Dividend Policies
Cramer Industries has identified several investment opportunities that will become available over the next three years and would like you to evaluate these projects. They have asked that you use the NPV and IRR methods to determine if these independent projects are acceptable. Each of these investments will occur one year apart and the cash flows will start one year after the investment is made.
Table-1:
Project
Cash Flows/Year(in thousands)
Length of Project
Cost and Date when Cost is incurred
A
$ 2,300.00
5 years
$ 12,000.00 @t=1
B
$ 3,000.00
$ 17,000.00 @t=2
C
$ 2,800.00
$ 13,000.00 @t=3
D
$ 2,100.00
$ 15,000.00 @t=4
Cramer currently has 2,000,000 shares outstanding and pays a dividend of $2 per share.
With a high degree of certainty, Cramer has projected their income for the next four years as follows, which includes the annual cash flows from the investments selected above:
Table-2:
Year
Income After Taxes
1
$6,000.00
2
$8,000.00
3
$5,000.00
4
$7,000.00
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