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# Capital Budgeting Essay

858 words - 4 pages

Assignment 3 Exercise 6
For Professor
By Landis Rush
May 13, 2012

In the following paper, we are presented with two options in which to make an investment Options A and B.
Options A and B is presented with the following chart data: Options A and B have two initial investments and the goal is to determine which investment is the best option. Option A’s initial investment is \$2,000,000 and B is \$2,500,000 with each having benefits gained throughout ten years. The first step is to determine the payback period for each option. I used the Excel formula to calculate these computations. The payback period is the amount of time for the initial investment to be paid ...view middle of the document...

Data Chart
|   | Option A |   |   |   | Option B |   |
|   | Oper&Main |   |   |   | Oper&Main |   |
Year | Capital Cost | Cost | Benefits |   | Capital Cost | Cost | Benefits |
1 | 2,000,000 | 0 | 0 |   | 2,500,000 | 0 | 0 |
2 | 1,000,000 | 10,000 | 0 |   | 500,000 | 50,000 | 750,000 |
3 | 500,000 | 70,000 | 120,000 |   |   | 100,000 | 750,000 |
4 |   | 90,000 | 600,000 |   |   | 100,000 | 750,000 |
5 |   | 90,000 | 800,000 |   |   | 100,000 | 750,000 |
6 |   | 90,000 | 800,000 |   |   | 100,000 | 750,000 |
7 |   | 90,000 | 800,000 |   |   | 100,000 | 750,000 |
8 |   | 90,000 | 800,000 |   |   | 100,000 | 750,000 |
9 |   | 100,000 | 800,000 |   |   | 100,000 | 750,000 |
10 |   | 100,000 | 500,000 |   |   | 100,000 | 300,000 |
|   |   |   |   |   |   |   |
| Payback Period A |   |   |   | Payback Period B |   |   |
1 | 2,000,000 |   |   |   | 2,500,000 |   |   |
2 | 2,000,000 |   |   |   | 1,750,000 |   |   |
3 | 1,880,000 |   |   |   | 1,000,000 |   |   |
4 | 1,280,000 |   |   |   | 250,000 |   |   |
5 | 480,000 |   |   |   | -500,000 | 4.33 | years |
6 | -320,000 | 5.60 | years |   |   |   |   |
7 |   |   |   |   |   |   |   |
8 |   |   |   |   |   |   |   |
9 |   |   |   |   |   |   |   |
10 |   |   |   |   |   |   |   |
| IRR Option A |   |   | IRR Option B |   |   |   |
| 18.96% | -2,000,000 |   | 25.53% | -2,500,000 |   |   |
|   | 0 |   |   | 750,000 |   |   |
|   | 120,000 |   |   | 750,000 |   |   |
|   | 600,000 |   |   | 750,000 |   |   |
|   | 800,000 |   |   | 750,000 |   |   |
|   | 800,000 |   |   | 750,000 |   |   |
|   |...

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