Quible Industries comprises four divisions, each operating in a different industry. The divisions are currently preparing their capital expenditure budgets for the coming year. The Caledonia Division, located in the northeastern United States, manufactures home appliances that it distributes nationally. The manufacturing and marketing departments of Caledonia have proposed six capital expenditure projects for next year. The division manager must now analyze these investment proposals and select those projects that will be included in the capital budget to be submitted to Quible Industries for approval. The proposed projects in the following list are considered to have the same degree of risk.
€¢ Project A. Redesign and modification of an existing product that is currently scheduled to be dropped. The enhanced model would be sold for 6 more years.
€¢ Project B. Expansion of a line of cookware that has been produced on an experimental basis for the past year. The expected life of the cookware line is 8 years.
€¢ Project C. Reorganization of the plant's distribution center, including the installation of computerized equipment for tracking inventory. This project would benefit both administrative and marketing.
€¢ Project D. Addition of a new product, a combination bread and meat slicer. In addition to new manufacturing equipment, a significant amount of introductory advertising would be required. If this project is implemented, Project A would not be feasible due to limited capacity.
€¢ Project E. Automation of the packaging department, which would result in cost savings over the next 6 years.
€¢ Project F. Construction of a building wing to house offices presently located in an area that could be used for manufacturing. The change would not add capacity for new lines but would alleviate crowded conditions that currently exist, making it possible to improve the productivity of two existing product lines that have been unable to meet market demand.
Quible Industries has established a hurdle rate of 12% for capital expenditures for all four divisions. The hurdle rate is the company's long-term desired cost of capital. Additional information about each of Caledonia Division's six proposed projects follows:

Required:
(1) Explain how each of the following quantitative techniques is used in evaluating capital expenditure proposals and what it is designed to measure.
(a) Payback method
(b) Net present value method
(c) Internal rate of return method
(2) If Caledonia Division has no budget restrictions for capital expenditures and has been told to maximum the value of the company, identify the capital investment projects that should be included in the Division's capital budget to be submitted to Quible Industries. Explain why the projects should be included or excluded.
(3) Assume that Quible Industries has specified that Caledonia Division will be restricted to a maximum of $450,000 for capital expenditures, and that Caledonia should select projects that maximize the value of the company. Further assume that any budget not spent on the identified projects will be invested at the hurdle rate of 12%. Identify the capital investment projects Caledonia should include in its capital expenditures budget to be submitted to Quible Industries in this situation, and explain the basis for their inclusion

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ProjectA Project BProject C ProjectD ProjectE Project F Initial investment..$106,000 S200,000 S140,000 S160,000 S144,000 S130,000 After-tax cash inflows Year 1 Year Year Year4 $50,000 $20,000 $36,000 20,000 $50,000 $40,000 40,000 40,000 40,000 40,000 40,000 40,000 42,000 50,000 40,000 40,000 30,000 40,000 40,000 50,000 60,000 60,000 60,000 40,000 44,000 36,000 36,000 36,000 36,000 30,000 40,000 50,000 60,000 70,000 80,000 66,000 50,000 50,000 20,000 20,000 11,600 ear Year6 Year 7 Tear Total inflows Payback period Netpresentvalue $250,000 S374.000 $180,000 3.9 yrs 4.3 yrs $69,683 S23.733 S(10,228) $74,374 22% 416,000 $201,600 $322,000 3.3 yrs $6,027 69,513 26% 2.2 yrs 4.5 yrs 2.9 yrs Internal rate of return 35% 15% 9% 14%