Posted: April 13th, 2023

Discussion essay

Prior to beginning work on this discussion, please read the article Capital Investment Appraisal Techniques: A Survey of Current Usage (Links to an external site.) by Sangster (1993).

After setting the company’s goals, managers evaluate capital investment projects and decide which should be funded. Suppose a company has four different capital budgeting projects from which to choose but has constrained funds and cannot implement all of the projects.

The following table contains information about four projects in which X Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about the company’s potential project.

Project

Investment Required

Net Present Value

Life of Project

Internal Rate of Return

Profitability Index

Payback Period in Years

Accounting Rate of Return

A

$ 226,000

$ 36,908

5

21%

1.17

2.97

20%

B

$ 406,000

$ 50,740

6

24%

1.13

3.13

15%

C

$1,040,000

$152,325

3

19%

1.16

2.18

14%

D

$1,630,000

$ 19,870

4

14%

1.02

3.00

23%

Part 1: Rank the four projects in order of preference by using the following table:

(a)
Net Present Value

(b)
Profitability Index

(c)
Internal Rate of Return

(d)
Payback Period

(e)
Average Rate of Return

1st preferred

Project A, B, C, or D?

2nd preferred

3rd preferred

4th preferred

Part 2: Write a response in an initial post of at least 200 words discussing the usefulness of capital investment techniques (net present value, profitability index, internal rate of return, payback period, and average rate of return) in selecting the four alternative investment opportunities in part 1.

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