Citco Company is considering investing up to $500,000 in a sustainability-enhancing project. Its managers have narrowed their

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Citco Company is considering investing up to $500,000 in a sustainability-enhancing project. Its managers have narrowed their choices to three potential projects.
• Project A would redesign the production process to recycle raw materials waste back into the production cycle, saving on direct materials costs and reducing the amount of waste sent to the landfill.
• Project B would remodel an office building, utilizing solar panels and natural materials to create a more energy-efficient and healthy work environment.
• Project C would build a new training center in an underserved community, providing jobs and economic security for the local community.
The following table summarizes the costs and benefits of these three hypothetical projects:
Project A Project B Project C
(Redesign production (Remodel office (New training
process) building) facility)
Required Investment............$(500,000)......................$(420,000)...............$(320,000)
Annual Cost Savings..............$ 100,000...........................60,000....................80,000
Project Life...........................8 years...........................10 years...................6 years
Salvage Value......................$ 80,000..........................$ 75,000..................$ 30,000
Payback Period
NPV
Profitability Index
Internal Rate of Return
Required:
1. Assuming the cost of capital is 12%, complete the preceeding table by computing the payback period, NPV, Profitability Index, and Internal Rate of Return.
2. Based strictly on the economic analysis, in which project should they invest?
3. What other factors should managers consider before reaching a final decision?
4. Repeat requirement 1 using a cost of capital of 14%. Which of the capital budgeting indicators changed and which remained the same? Why?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Managerial Accounting

ISBN: 978-0077826482

3rd edition

Authors: Stacey Whitecotton, Robert Libby, Fred Phillips

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