Payback Method Assignment
Clarabelles Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $9,000,000 for the year. Lyssa Bentley, the staff analyst at Clarabelles, is preparing an analysis of the three projects under consideration by Chuck Clarabelles, the company's owner. E: (Click the icon to view the data for the three projects.) Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. Requirements 1. Because the company's cash is limited, Clarabelles 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 Clarabelles choose? 2. Bentley 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. Print Done © Data Table Project A Project B Project C Projected cash outflow Net initial investment $ 4,500,000 $ 2,000,000 $ 5,000,000 Projected cash inflows Year 1 $ Year 2 1,500,000 $ 1,500,000 1,500,000 1,500,000 600,000 $ 2,700,000 1,300,000 2,700,000 500,000 150,000 75,000 Year 3 Year 4 Required rate of return 8% 8% 8% Print Done Requirement 1. Because the company's cash is limited, Clarabelles 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? Benefits of the payback method: OA. Utilizes the time value of money and computes each project's unique rate of return OB. Indicates whether or not the project will earn the company's minimum required rate of return O C. Easy to understand and captures uncertainty about expected cash flows in later years of a project OD. All of the above. .