# Finance Question – Capital Budgeting and Dividend Policies

Capital Budgeting and Dividend Policies

Cramer Industries has identified several investment opportunities that will become available over the next three years and would like you to evaluate these projects. They have asked that you use the NPV and IRR methods to determine if these independent projects are acceptable. Each of these investments will occur one year apart and the cash flows will start one year after the investment is made.

Table-1:

Project

Cash Flows/Year
(in thousands)

Length of Project

Cost and Date when Cost is incurred

A

\$ 2,300.00

5 years

\$ 12,000.00 @t=1

B

\$ 3,000.00

5 years

\$ 17,000.00 @t=2

C

\$ 2,800.00

5 years

\$ 13,000.00 @t=3

D

\$ 2,100.00

5 years

\$ 15,000.00 @t=4

Cramer currently has 2,000,000 shares outstanding and pays a dividend of \$2 per share.

With a high degree of certainty, Cramer has projected their income for the next four years as follows, which includes the annual cash flows from the investments selected above:

Table-2:

Year

Income After Taxes

1

\$6,000.00

2

\$8,000.00

3

\$5,000.00

4

\$7,000.00

Present your analysis of the assigned problems in Excel format. Enter non-numerical responses in the same worksheet using textboxes.

Correctly calculated the NPV for each project and explained its meaning and significance to the firm.20Correctly calculated the IRR for each project and explained its meaning and significance to the firm.20Correctly selected the projects in which the company should invest and justified the conclusions.20Correctly determined the external financing requirement, assuming the current dividend policy is maintained and justified the response.24Correctly determined the external financing requirement, assuming that a 50% payout ratio is maintained and justified the response.24Correctly determined the external financing requirement, assuming it is a residual decision and justified the response.24Correctly identified the dividend policy that minimizes the external financing level and justified the response.24Written Components:
Organization (12)
usage and mechanics (12)
APA elements (16)
Style (4)44Total:200