Capital Budgeting Tools
Class Exercise
1. You’ve been hired to consult for a local parks and recreation department for Pawnee, Indiana.
The new city manager, Ron Swanson, has decided that all new projects must be a net positive
for the city, i.e., they must have a positive NPV. Ben, the city accountant has set the required
return at 5%. The city is also concerned with how long it takes to recoup the initial investment
and has set a 2.5 year payback period limit. Leslie and her team have proposed three projects
for you to evaluate: i) Petting Zoo ii) Aquatics Center iii) Outdoor Concert Series. The cash
flows from those projects are listed below.
Year Petting Zoo Aquatics Center Outdoor Concert Series
0 -150,000 -2,500,000 -25,000
1 30,000 380,000 21,000
2 35,000 425,000 28,000
3 40,000 520,000 -20,000
4 45,000 735,000 65,000
5 45,000 950,000 -75,000
(a) Calculate the metrics to make a proper decision on each project?
(b) Make the accept reject decision for each project (assume independence).
(c) What is a potential issue with “Outdoor Concert Series” cash flows? When should you
accept this project?
(d) Due to the availability of land the Parks Department can only pursue either the Petting
Zoo project or the Aquatics Center. Which project should you accept?
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