Question

Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?

A) NPV
B) Payback
C) IRR
D) Two of the above

Answer 1

The most useful capital budgeting method for the given project is the NPV (Net Present Value) method. By calculating the present value of cash flows and subtracting the initial cost, NPV provides a way to assess the profitability of the project.

Step-by-step explanation:

The most useful capital budgeting method for evaluating the given project is the NPV (Net Present Value) method. NPV measures the present value of the project's cash flows by discounting them back to the present at a required rate of return. The project has an initial cost of $5,000,000 and is expected to generate after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4. By calculating the present value of these cash flows and subtracting the initial cost, the NPV can be determined to assess the profitability of the project.