1a). What is capital budgeting?

Its a process of analyzing long term projects to determine which project/s will help in increasing the shareholders value. b). What is the difference between independent and mutually exclusive projects? Independent projects are those projects which are not affected by others acceptance or refusal. Acceptance of one project does not affect the decision criteria for the other. But mutually exclusive projects are affected by each other and hence the acceptance of one means the rejection of the other. C1). What is the Payback period? Find the paybacks for Franchises L and S. Payback period is the length of time in which a projects initial cash investment is recouped or recovered. Calculation on spreadsheet. C2. What is the rationale for the payback method? According to the payback criterion, which franchise or franchises should be accepted if the firms maximum acceptable payback is 2 years, and if Franchises L and S are independent? If they are mutually exclusive? The Payback method shows how long it takes the recover the initial amount of investment in a project. If the company wishes to recover it soon for purposes of reinvestment or other reasons, then the shorter the period, the more preferable it is. If the maximum payback period is 2 years, then Franchise S should be accepted as its payback is lower than 2. If they are mutually exclusive, also then Franchise S should be chosen as it has lower payback period than L. C3). What is the difference between the regular and discounted payback periods? The regular payback period does not consider the time value of money and so do not use the discounted cash flows. The Discounted payback period on the other hand discounts the cash flows at the cost of capital. C4). What is the main disadvantage of discounted payback? Is the payback method of any real usefulness in capital budgeting decisions? It does not give a lot of importance to the cash flows that incur after the payback period. Some projects have high cash inflows towards the end and this method under estimates such projects. It however helps in capital budgeting decisions. It helps to know which projects will yield more inflows first as this can then be reinvested. Also the fact that huge inflows towards the end exposes is to several risks. Since this method emphasizes on the recent cash flows, it is likely to prefer the less risky projects. D1). Define the term net present value. What is each Franchises NPV?

Net Present Value is the difference between a projects cash outflows and cash inflows which are discounted at the present value. Calculations on the Spreadsheet.