Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa Bickerson, staff analyst at Lulus, is preparing an analysis of the three projects under consideration by Caden Lulus, the company’s owner.

Required

1. Because the company’s cash is limited, Lulus 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 projects should Lulus choose?
2. Bickerson 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 explain why.

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Home 4 1 2 Projected cash outflow 3 Net initial investment Insert A 5 6 Year 1 7 Year 2 8 Year 3 Year 4 Projected cash inflows: Page Layout 9 10 11 Required rate of return Formulas B Project A $6,000,000 $2,050,000 $2,050,000 $2,050,000 $2,050,000 8% Data с Project B $4,000,000 Review 8% View D Project C $8,000,000 $1,100,000 $4,700,000 2,300,000 $4,700,000 700,000 50,000 25,000 8%