Finance Two Lab Assignments

FN2640: Week 5 Capital Budgeting and Structure

Lab 5.1/Capital Budget Techniques

1

The Sanders Electric Company is evaluating two projects for possible inclusion in the firm’s capital

budget. Project M will require a $37,000 investment while project O’s investment will be $46,000.

After-tax cash inflows are estimated as follows for the two projects:

YEAR PROJECT M PROJECT O

1 $12,000 $10,000

2 12,000 10,000

3 12,000 15,000

4 12,000 15,000

5 15,000

a. Determine the payback period for each project.

b. Calculate the net present value and profitability index for each project based on a 10 percent

cost of capital. Which, if either, of the project is acceptable?

c. Determine the internal rate of return and modified internal rate of return for Projects M and O.

Click here to access the worksheet for this assessment.

Source textbook: Melicher, R. W., & Norton, E. A. (2011). Introduction to finance: Markets,

investments, and financial management (14th ed.). Hoboken, NJ: John Wiley.

Submission Requirements:

Answer each problem in detail with a conclusion and results.

Submit your answer in a Microsoft Excel file, showing step-by-step solutions to all calculations.

Evaluation Criteria:

You will be evaluated on the following points using the rubric for your performance in this

assessment:

Did you accurately determine the payback period for each project?

Did you accurately calculate the net present value and profitability index for each project?

Did you correctly predict which of the projects is acceptable and provided the reasons for

your choice?

Did you accurately determine the internal rate of return and modified the internal rate of

return for Projects M and O?

Click here to download the rubric that will be used to evaluate this lab.