Question Description
Pearland Medical Center is considering two proposed capital investment opportunities, Project A and Project B. Each project requires a net investment of $100,000. The cost of capital for each project is 12 percent. The projects’ expected cash revenues are:
|
Year |
Project A |
Project B |
|
0 |
($100,000) |
($100,000) |
|
1 |
$62,500 |
$32,625 |
|
2 |
$30,000 |
$32,625 |
|
3 |
$28,000 |
$32,625 |
|
4 |
$10,000 |
$32,625 |
- Calculate each project’s payback period, net present value, and internal rate of return. Explain which project is financially acceptable.
- Avery, Flaherty, and Rhee (2011) noted that when choosing a capital budgeting decision tool, academics recommend NPV as the primary approach followed by IRR. What are the advantages and disadvantages of NPV and IRR methods in regards to profitability
OR
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