Capital Budgeting Problems
I. Indigo Industrial, Inc. is trying to determine which, if any, of five different projects it should undertake. Indigo Industrial has a 8.25% required rate of return on projects that it undertakes. The projected cash flows for each of the projects are given in the table below:
Year Project 1 Project 2 Project 3 Project 4 Project 5
2009 (3,500) (34,900) (75,000) (90,000) (90,000)
2010 350 18,000 15,000 15,000 50,000
2011 650 18,000 15,000 25,000 30,000
2012 750 10,000 15,000 35,000 25,000
2013 1,300 7,000 15,000 50,000 15,000
2014 1,400 15,000

I.1. Calculate the payback period for each of the projects:
_____________ a. Payback period for Project 1
_____________ b. Payback period for Project 2
_____________ c. Payback period for Project 3
_____________ d. Payback period for Project 4
_____________ e. Payback period for Project 5

I.2. Calculate the net present value (NPV) for each of these projects:
_____________ a. NPV for Project 1
_____________ b. NPV for Project 2
_____________ c. NPV for Project 3
_____________ d. NPV for Project 4
_____________ e. NPV for Project 5

I.3. Calculate the internal rate of return (IRR) for each of these projects:
_____________ a. IRR for Project 1
_____________ b. IRR for Project 2
_____________ c. IRR for Project 3
_____________ d. IRR for Project 4
_____________ e. IRR for Project 5

I.4. Calculate the profitability index for each of the projects:
_____________ a. PI for Project 1
_____________ b. PI for Project 2
_____________ c. PI for Project 3
_____________ d. PI for Project 4
_____________ e. PI for Project 5

I.5. If Indigo Industrial had an unlimited budget with which to work, which projects should it undertake? Why?

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