Finance Budgeting Questions

Answer in detail and provide work.

——————————————————————————————————————–Question:
Southern Oregon Business (SOB) – a startup company operating in the Rouge Valley – is currently
looking to invest in Project A with the estimated cash flows as follows:
Initial Investment at start of project = $3,600,000
Cash Flow at end of year 1 = $500,000
Cash Flow at end of years 2 through 6 = $625,000 each year
Cash Flow at end of years 7 through 9 = $530,000 each year
Cash Flow at end of year 10 = $385,000
SOB financial manager would like to evaluate Project A through various capital budgeting models to
ensure that this project is worth investment. Please answer the following questions:
1. SOB wants to know the payback period of this project. Suppose the cutoff period is 6 years.
Based on the decision rule for the payback period, determine whether SOB should accept or reject
this project. Show your work and provide reasons for your answer.
2. Suppose the appropriate discount rate is 14%, and SOB wants to know this project’s net present
value (NPV). Based on the NPV decision rule, determine whether SOB should accept or reject
this project. Show your work and provide reasons for your answer.
3. Suppose the appropriate hurdle rate is 14%, and SOB wants to know this project’s internal rate of
return (IRR). Based on the IRR decision rule, determine whether SOB should accept or reject this
project. Show your work and provide reasons for your answer.
4. Based on your answers in questions 1-3, do you find the payback period, NPV, and IRR yield the
same result regarding whether or not it is worth investing in Project A? If there is an
inconsistency, which method would you recommend to the financial manager at SOB? Provide
your reasons, and discuss some of the strengths and shortcomings of your recommended method.
5. Suppose the SOB financial manager is also considering an alternative investment, namely project
B, whose NPV is $80,350. Assume that Project A and B are mutually exclusive (i.e., the
companies must choose a single project due to its limited resources for investing in multiple
projects simultaneously). Would you recommend the SOB to invest in Project A or B? Provide
reasons for your answer.