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:
- 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 analysis in evaluating investment decisions?
- Why are firms using the payback period method as a primarily decision-making tool?
Length: 3 pages and a reference page references.
Paper should include 2-3 creditable references cited inside the paper. Paper is APA format and should include links inside the reference page so that I may check over the work. ALL WORK MUST BE ORIGINAL
Explanation & Answer
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Running Head: CAPITAL INVESTMENT DECISION
Capital Investment Decision
CAPITAL INVESTMENT DECISION
Presented with two capital investment opportunities, Pearland Medical Center management
has a tough decision to make concerning which investment to accept. Both investments require a
$100,000 initial capital outlay, as a cost of capital of 12% and a project period of four years. To
determine which project is financially acceptable, the management has made use of three capital
investment technique namely payback period method, Internal Rate of Return technique and Net
present value method.
Determination of Payback Period, NPV, and IRR
Net present value, payback period and internal rate of return are the three most common
capital budgeting techniques used by most organizations. NPV discounts the project forecasted
cash flow to determine its current value. A project with a positive NPV is usually considered
viable. The payback period on the other calculates the time it takes for a project cash flows to be
equal to the initial outlay. For the project with even cash flow throughout the project period, the
payback period is the initial investment divided by the annual cash fl...