Clarabelles Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year.

Question:

Clarabelles Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $ 10,000,000 for the year. Laura Bobo, staff analyst at Clarabelles, is preparing an analysis of the three projects under consideration by Calvin Clarabelles, the companyâ€™s owner.

Required
1. Because the companyâ€™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 project should Clarabelles choose?
2. Bobo 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 explainwhy.

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... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...