Capital Budgeting

A firm is considering two investment projects, Y and Z. These projects are NOT mutually
exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these
projects are:

(a) Using a discount rate of 9% calculate the net present value for each project. What decision
would you make based on your calculations? (4 marks)
(b) How would your decision change if the discount rate used for calculating the net present
value is 15%? (4 marks)
(c) Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision
would you make based on your calculations? (4 marks)
(d) Calculate the payback period for each project. The company looks to select investment projects
paying back in 2 years. What decision would you make based on your calculations? (3 marks)
(e) Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback
period as criteria for investment appraisal.

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