Vasquez Corporation is considering investing in two different projects. It could invest in both, neither, or just one of the projects. The forecasts for the projects are as follows.
|
Project A |
Project B |
|
|
Capital investment |
$200,000 |
$300,000 |
|
Net annual cash flows |
$50,000 |
$65,000 |
|
Length of project |
5 years |
7 years |
The minimum rate of return acceptable to Vasquez is 10%.
Instructions
(a) Compute the net present value of the two projects.
(b) What capital budgeting decision should Vasquez make?
(c) Project A could be modified. By spending $20,000 more initially, the net annual cash flows could be increased by $10,000 per year. Would this change Vasquez’s decision?