Citco Company is considering investing up to $500,000 in a sustainability-enhancing project. Its managers have narrowed their choices to three potential projects.
• Project A would redesign the production process to recycle raw materials waste back into the production cycle, saving on direct materials costs and reducing the amount of waste sent to the landfill.
• Project B would remodel an office building, utilizing solar panels and natural materials to create a more energy-efficient and healthy work environment.
• Project C would build a new training center in an underserved community, providing jobs and economic security for the local community.
The following table summarizes the costs and benefits of these three hypothetical projects:
Project A Project B Project C
(Redesign production (Remodel office (New training
process) building) facility)
Required Investment.......$(450,000)..................$(300,000)........................$(400,000)
Annual Cost Savings........$ 100,000........................60,000..............................80,000
Project Life......................8 years......................10 years..............................6 years
Salvage Value.................$ 40,000......................$ 75,000...........................$ 80,000
Payback Period
NPV
Profitability Index
Internal Rate of Return
Required:
1. Assuming the cost of capital is 10%, 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 requirements 1 and 2 using a cost of capital of 8%. Which of the capital budgeting indicators changes and which remains the same? Why?