=+18-23 KK Payback and NPV methods, no income taxes (CMA, adapted) OBJECTIVES 3, 5 Jackson’s Excavators is analysing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $10000000 for the year. Jenny, the management accountant at Jackson’s, is preparing an analysis of the three projects under consideration by Maxwell Jackson, the company’s owner.

1 2

3 4

5 6

7 8

9 10 11 A B C D Project A Project B Project C Projected cash outflow Net initial investment $5 000 000 Projected cash inflows Year 1 $ $

Year 2 750 000 Year 3 750 000 Year 4 750 000 Required rate of return

$2 700 000 $3 500 000

$750 000 12% 12% 12%

1 500 000 500 000 2 000 000 2 000 000 250 000 600 000 700 000 12 13 Year 5 Year 6 200 000

—

900 000 800 000 900 000 750 000 750 000 718 Chapter 18: Capital budgeting and cost analysis M18_HORN3377_02_LT_C18.indd 718 2/09/13 4:03 PM Required 1 Because the company’s cash is limited, Maxwell thinks the payback method should be used to choose between the capital budgeting projects.