BASFIN1: ASSIGNMENT # 8: CASH FLOWS & OTHER TOPICS IN CAPITAL BUDGETING

Note: Questions were obtained from another source

Ms. Reena Almonte

Questions:

1. Special Problem:

Valley Corporation is attempting to select the best group of independent projects competing for
the firm’s fixed capital budget of PHP 4.5 million. The firm recognizes that any unused portion of
this budget will earn less than its 15% cost of capital, thereby resulting in a present value of
inflows that is less than the initial investment. The firm has summarized the key data to be used
in selecting the best group of projects:

Project Initial Investment IRR PV of Inflows at 15%

(in PHP) (in %) (in PHP)
A 5,000,000 17 5,400,000
B 800,000 18 1,100,000
C 2,000,000 19 2,300,000
D 1,500,000 16 1,600,000
E 800,000 22 900,000
F 2,500,000 23 3,000,000
G 1,200,000 20 1,300,000

A. Use the IRR Approach to select the best group of projects.

B. Use the NPV Approach to select the best group of projects.
C. Which project(s) should the firm implement? Why?

2. Special Problem:

A firm is considering 2 mutually exclusive projects, Project “A” & Project “B”. The after-tax cash
flows from the 2 projects are as follows:

Year Project “A” Project “B”

0 (35,000) (35,000)
1 11,000 20,000
2 11,000 15,000
3 11,000 5,000
4 11,000 -
Required return 15% p.a.

Which project should the firm accept? Why?

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