Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

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Business

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29 April, 06:32

Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

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Alexander Cox · Answer 1

NPV discounted at cost of capital

Explanation:

Internal Rate of Return: As there are 2 negative cash flow, the IRR will have two different values, so it would not be a good idea to use it.

The best way will be the net present value with the discounted cash flow at the cost of capital, that way all the cash inflow and outflow are discounted at the same rate and can be compare to know the net value of the investment.