our boss, the chief (CFO) Southern Textiles, has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's fabric line. It would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Southern is planning to introduce an entirely new fabric at that time. Here are the net cash flow estimates (in thousands of dollars): Expected Net Cash Flows Year Project L Project S $(100) $(100) 10 70 50 0 1 2 60 3 80 20 The CFO also made subjective risk assessments of each project, and he concluded that the projects both have risk characteristics that are similar to the firm's average project. Southern's required rate of return is 10%. You must now determine whether one or both of the projects should be accepted. Start by answering the following questions: 2. What is capital budgeting? Are there any similarities between a firm's capital budgeting decisions and an individual's investment decisions? b. What is the difference between independent and mutually exclusive projects? Between projects with conventional cash flows and projects with unconventional cash flows?
our boss, the chief (CFO) Southern Textiles, has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's fabric line. It would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Southern is planning to introduce an entirely new fabric at that time. Here are the net cash flow estimates (in thousands of dollars): Expected Net Cash Flows Year Project L Project S $(100) $(100) 10 70 50 0 1 2 60 3 80 20 The CFO also made subjective risk assessments of each project, and he concluded that the projects both have risk characteristics that are similar to the firm's average project. Southern's required rate of return is 10%. You must now determine whether one or both of the projects should be accepted. Start by answering the following questions: 2. What is capital budgeting? Are there any similarities between a firm's capital budgeting decisions and an individual's investment decisions? b. What is the difference between independent and mutually exclusive projects? Between projects with conventional cash flows and projects with unconventional cash flows?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 6EB: The management of Ryland International Is considering Investing in a new facility and the following...
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