Prior to beginning work on this discussion, please read the article Capital Investment Appraisal Techniques: A Survey of Current Usage (Links to an external site.) by Sangster (1993).
After setting the company's goals, managers evaluate capital investment projects and decide which should be funded. Suppose a company has four different capital budgeting projects from which to choose but has constrained funds and cannot implement all of the projects.
The following table contains information about four projects in which X Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about the company's potential project.
| Project | Investment Required | Net Present Value | Life of Project | Internal Rate of Return | Profitability Index | Payback Period in Years | Accounting Rate of Return |
| A | $ 226,000 | $ 36,908 | 5 | 21% | 1.17 | 2.97 | 20% |
| B | $ 406,000 | $ 50,740 | 6 | 24% | 1.13 | 3.13 | 15% |
| C | $1,040,000 | $152,325 | 3 | 19% | 1.16 | 2.18 | 14% |
| D | $1,630,000 | $ 19,870 | 4 | 14% | 1.02 | 3.00 | 23% |
Part 1: Rank the four projects in order of preference by using the following table:
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| (a) | (b) | (c) | (d) | (e) |
| 1st preferred | Project A, B, C, or D? |
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| 2nd preferred |
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| 3rd preferred |
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| 4th preferred |
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Part 2: Write a response in an initial post of at least 200 words discussing the usefulness of capital investment techniques (net present value, profitability index, internal rate of return, payback period, and average rate of return) in selecting the four alternative investment opportunities in part 1.
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