5-Minute Work-out: Capital Budgeting

Created by Pamela Peterson Drake

Consider the following two investments, A and B:

 End of year cash flow
 Asset AAsset B
1997-$100,000-$100,000
1998+$50,000 $0
1999+$50,000$0
2000+$50,000$152,087.50

The cost of capital for both projects is 10%. Complete the following table:

Method Asset AAsset B
Payback period   
Discounted payback period   
Net present value   
Internal rate of return   
Modified internal rate of return, reinvestment at 0%   
Modified internal rate of return, reinvestment at 5%   


Solutions to 5-minute Work-out: Capital Budgeting

MethodAsset AAsset B
Payback period 2 years3 years
Discounted payback period 3 years3 years
Net present value+$24,342.60 +$14,265.59
Internal rate of return 23.38%15%
Modified internal rate of return, reinvestment at 0% 14.47%15%
Modified internal rate of return, reinvestment at 5% 16.38%15%