Reference no: EM132588371

The proposed planned expansion into the Asian countries would require manufacturing plants being set up in Vietnam, in this regard the production team are attempting to select the best of two mutually exclusive projects.

The initial investment and after-tax cash inflows associated with these projects are shown in the following table:

Cash flows                                   Project A                       Project B

Initial investment (CF 0)             $60,000                      $100,000

Cash inflows (CFt), t1 to 5           $20,000                    $ 31,500

You are required to:

Question 1) In the context of capital budgeting, explain why capital investment decisions are considered to be the most important decisions made by a firm's management?

Question 2) Briefly explain why capital budgeting projects are evaluated on the basis of incremental cash flows?

Question 3) Calculate the payback period for each project.

Question 4) Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%.

Question 5) Calculate the internal rate of return (IRR) for each project.

Question 6) Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.