Question

Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $ 5,000,000 for the year. Lori Babson​, staff analyst at Halls​, is preparing an analysis of the three projects under consideration by Corey Halls​, the​ company's owner.

Homework: Chapter 21 Homework Save Score: 0.2 of 3 pts 7 9 of 12 (10 complete) HW Score: 52.67%, 15.8 of 30 pts %E21-27 (similar to) Question Help i Data Table - X Blysis of Halls Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is the three projects under consideration by Corey Halls, the company's owner. (Click the icon to view the data for the three projects.) í Requirements Project A Project B Project C Projected cash outflow Net initial investment bital $3,000,000 $2,100,000 $ 3,000,000 Projected cash inflows Year 1 1. Because the company's cash is limited, Halls thinks the payback method should be used to choose between the capital budgeting projects. a. What are the benefits and limitations of using the payback method to choose between projects? b. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Halls choose? 2. Babson thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of the year except for initial investment amounts Calculate the NPV for each project. Ignore income taxes 3. Which projects, if any, would you recommend funding? Briefly explain why Year 2 $ 1,200,000 $ 1,200,000 $ 1,700,000 1,200,000 600,000 1,700,000 1,200,000 500.000 200.000 1,200,000 100,000 Year 3 Year 4 Print Print Done Required rate of return 6% 6% 6% 7 parts Clear All Print Done I remaining

Answer 1

Refer to the below images for the above asked questions, in a detailed way of solution with calculations and explanations.

Requirement 0 : (a) payback measures the time it will tance to recoup, in The form of expected tuture cast flows, the net initial investment in a project payback emphasizes the early recovery of cast asa Icey aspect of project ranting Sor argue that this emphasis hasis on on early early recovery recovery of of cash cash is appropriate if there is a high level of uncertainty about future profats with shorter paybacks give the organization mo flexibility because funds for other proiects become available sooner- Benefits : - Easy to understand - one way to capture uncertainty in later years of a project is a more systematic way). about expected cash (although sensitivity flows analysis value of money, unless Limitations : - fails to discounted Does not payback incorporate payback consider period. the time is used. a project's cost flows after (b) pay back period : project A: out flow $ 3 000 000 Inflow, $ 1200000 (year 1) + & 1200000 (year2) + $ 1.200.000 (year 3) pay back a s $ 3000000 - $1200000 - $ 1200000 period = 2 years + - $ 1200000 - 2 years t 0.5 - 25 years

project B : out flows - $ 2100000 Inflows = $ 1.200.000 (year i) + 600000 (year 2) + $ 50000 (years) (2100000 - $120000 pay back period = 2 years & 600000 & Sooooo (next year cash flows) - 2 years +0.6 = 2.6 years project c: out flows = 8 3 000 000 Inflows = $ 1700000 (year 1)t $ 1700000 (year 2) pay back period - 1 year & | &3000000 - $17000) $ 170000D - year +0.76 = 1.76 years Sommary : project e Payback period 1.76 years 2.5 years 266 years project A project B It only = pay back is project c 3600000). the deading factor, Halls will choose (pay back period = 1076 years; investment

Net present value (NPV) for of each Calcolation Projects: Reacutremen year particulars 0 61- Initial investment cash in lows factor project A $(3000000) 0.943 1200000 0.890 200000 pow. of project proof project A B project B (3000000) (2100000) 1(2100000) 1131600 1200000 1131600 168000 600000 834000 1008000 500000 420000 - cash inflows e cash inflows 0.840 1200000 0.792 1200000 950400 W inflows I Cash $(14 400) $1158000 Nop. утас particulars factor @6.1- project pv. of projects Initial investment cash inflows cash inflows cast inflows cash inflows 0.943 0.890 0.640 0.792 $(3600000) 1700000 1700000 200000 I DO DOO $(3000000) 1603100 1513000 168000 79200 $363300 Nip.v. - Summary project project Project A c B Nopov & 1N8000 & 363300 & (14400)

Reajuixement using Npv rankings, projects As project co which require a total investment of & 300000 + $ 3000000 & $ 600.000 which is greater than the $ 5000000 capital budget, Should not be Fonded . Therefore project A should be fonded since it gives more cash flows comparing project B (As per N.p.v analysis) While, on the other hand project C should be tonded since it recovers investment in less than 1076 years only (As per payback period analysis).