## 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 A | Asset 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 A | Asset 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

Method | Asset A | Asset B |

Payback period | 2 years | 3 years |

Discounted payback period | 3 years | 3 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% |