Reference no: EM132622248

A bottle manufacturer is considering a new product line to supplement its existing range. Two mutually exclusive projects are under consideration and their after tax cash flows both inflows and outflows are as follows:

PROJECT             0               1               2               3              4                5

A             -700,000     150,000    350,000   650,000   1,150,000   1,650,000

B             -2,200,000    550,000   650,000   850,000   1,550,000   2,850,000

Though the product line might be viable after year 05, the company prefers to be conservative and end all calculations at that time.

Required:

Problem a) Based on the commonly used capital budgeting evaluation techniques, which project in your opinion should be accepted considering that the management requires a 10% return on investment however the management does not consider payback period to be an effective technique?

Problem b) In terms of evaluating the project(s) acceptability, would you agree or disagree that taking net profit after tax instead of after tax cash flows into consideration would provide more accurate results ?

Problem c) Capital budgeting techniques that do not consider time value of money provide a more practical/justified evaluation ? Would your answer to part a) been any different had the same been considered ?