Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $8,000,000 for the year. Lyssa Bentley, staff analyst at Andrews, is preparing an analysis of the three projects under consideration by Cullin Andrews, the company's owner. (Click the icon to view the data for the three projects.) Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. Requirement 1. Because the company's cash is limited, Andrews 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? Benefits of the payback method: O A. Indicates whether or not the project will earn the company's minimum required rate of return OB. Easy to understand and captures uncertainty about expected cash flows in later years of a project O C. Utilizes the time value of money and computes each project's unique rate of return D. All of the above Data table 1 A 2 Projected cash outflow C Project A Project B Project C Requirements 1. Because the company's cash is limited, Andrews 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 Andrews choose? Bentley 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 Net initial investment $ 4,000,000 $3,000,000 $4,000,000 2. 4 Projected cash inflows 5 Year 1 6 Year 2 $ 2,550,000 $ 800,000 $2,100,000 2,550,000 3. Which projects, if any, would you recommend funding? Briefly explain why. 1,600,000 2,100,000 7 Year 3 2,550,000 1,000,000 50,000 8 Year 4 2,550,000 25,000 Print Done 9 Required rate of return 6% 6% 6% Print Done Reference Present Value of $1 Periods 2% 4% 6% 8% Period 1 0.980 0.962 0.943 0.926 Period 2 0.961 0.925 0.890 0.857 0.826 10% 12% 0.909 0.893 0.797 Period 3 0.942 0.889 0.840 0.794 0.751 0.712 Period 4 0.924 0.855 0.792 0.735 0.683 0.636 Period 5 0.906 0.822 0.747 0.681 0.621 0.567 Period 6 0.888 0.790 0.705 0.630 0.564 0.507 0.456 Period 7 0.871 0.760 0.665 0.400 Period 8 0.853 0.731 Period 9 0.837 0.703 Period 18 0.700 Period 10 0.820 0.676 Period 11 0.804 0.650 Period 12 0.788 0.625 Period 13 0.773 0.601 Period 14 0.758 0.577 Period 15 0.743 0.555 Period 16 0.728 0.534 Period 17 0.714 0.513 0.494 0.123 0.108 0.080 0.060 Period 19 0.686 Period 20 0.673 0.475 0.456 Period 21 0.660 0.439 Period 22 0.647 0.422 Period 23 0.634 0.350 0.250 0.180 0.130 0.331 0.232 0.312 0.215 0.294 0.199 0.135 0.278 0.184 0.123 0.406 0.262 0.170 0.112 0.074 Period 24 0.622 0.390 0.247 0.158 0.102 0.066 0.043 Period 25 0.610 0.375 0.233 0.146 0.092 0.059 0.038 Period 26 0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 Period 27 0.586 0.347 0.207 0.125 0.076 0.047 0.029 0.018 0.095 0.069 0.051 0.038 0.164 0.116 0.083 0.060 0.043 0.031 0.149 0.104 0.073 0.051 0.037 0.026 0.093 0.064 0.044 0.031 0.022 0.083 0.056 0.038 0.026 0.018 0.049 0.033 0.022 0.015 0.028 0.019 0.013 0.024 0.322 0.40 110 0.010 0.016 0.010 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.769 0.743 0.718 0.694 0.672 0.650 0.630 0.610 0.592 0.574 0.675 0.641 0.609 0.579 0.551 0.524 0.500 0.477 0.455 0.435 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373 0.350 0.329 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.583 0.513 0.452 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194 0.167 0.144 0.125 0.108 0.094 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.047 0.497 0.397 0.319 0.257 0.208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.394 0.292 0.218 0.163 0.093 0.071 0.054 0.042 0.032 0.025 0.371 0.270 0.198 0.146 0.045 0.034 0.026 0.020 0.028 0.021 0.016 0.012 0.009 0.023 0.017 0.012 0.009 0.007 0.005 0.014 0.010 0.007 0.005 0.004 0.001 Period 20 0.011 0.008 0.006 0.004 0.003 0.001 Period 21 0.009 0.006 0.004 0.003 0.002 0.010 0.007 0.005 0.003 0.002 0.002 0.008 0.006 0.004 0.003 0.002 0.016 0.010 0.007 0.005 0.003 0.002 0.001 0.001 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001 0.000 0.011 0.007 0.005 0.003 0.002 0.001 0.001 0.001 0.000 0.000 40% Periods 0.714 Period 1 0.510 Period 2 0.364 Period 3 0.260 Period 4 0.250 0.186 Period 5 0.189 0.133 Period 6 0.143 0.095 Period 7 0.068 Period 8 0.082 0.048 Period 9 0.062 0.035 Period 10 0.036 0.027 0.025 Period 11 0.018 0.013 Period 13 Period 12 0.021 0.009 Period 14 0.025 0.020 0.016 0.006 Period 15 0.019 0.015 0.012 0.005 Period 16 0.015 0.012 0.009 0.003 Period 17 0.007 0.002 Period 18 0.002 Period 19 0.019 0.015 0.013 0.001 Period 22 0.000 Period 23 0.001 0.000 Period 24 0.000 Period 25 Period 26 Period 27 0.001 0.000 0.000 0.001 0.001 0.000 Bauled no Print Done Reference Present Value of Annuity of $1.00 in Arrears* Periods 2% 4% 6% 8% 10% 14% Period 1 0.980 Period 2 1.942 Period 3 2.884 Period 4 3.808 Period 5 4.713 Period 6 5.601 Period 7 6.472 0.962 Period 8 7.325 Period 9 8.162 Period 10 8.983 Period 11 9.787 Period 12 10.575 5.216 5.453 8.384 7.536 6.814 6.194 5.660 8.853 9.295 9.712 7.904 8.244 7.103 7.367 6.424 6.628 8.559 7.606 6.811 10.106 8.851 7.824 6.974 Period 17 14.292 12.166 10.477 9.122 8.022 7.120 Period 18 14.992 12.659 10.828 9.372 8.201 7.250 6.265 6.373 6.467 12% 16% 18% 20% 22% 24% 26% 28% 30% 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 1.886 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528 1.492 1.457 1.424 1.392 1.361 2.775 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106 2.042 1.981 1.923 1.868 1.816 3.630 3.465 3.312 3.170 3.037 2.914 2.798 2.690 2.589 2.494 2.404 2.320 2.241 2.166 4.452 4.212 3.993 3.791 3.605 3.433 3.274 3.127 2.991 2.864 2.745 2.635 2.532 2.436 5.242 4.917 4.623 4.355 4.111 3.889 3.685 3.498 3.326 3.167 3.020 2.885 2.759 2.643 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 3.416 3.242 3.083 2.937 2.802 6.733 6.210 5.747 5.335 4.968 4.639 4.344 4.078 3.837 3.619 3.421 3.241 3.076 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 3.786 3.566 3.366 3.184 8.111 7.360 6.710 6.145 5.650 4.833 4.494 4.192 3.923 3.682 3.465 8.760 7.887 7.139 6.495 5.938 5.029 4.656 4.327 4.035 3.776 9.385 5.197 4.793 4.439 4.127 3.851 Period 13 11.348 9.986 5.842 5.342 4.910 4.533 4.203 Period 14 12.106 10.563 6.002 5.468 5.008 4.611 4.265 3.962 Period 15 12.849 11.118 6.142 5.575 5.092 4.675 4.315 4.001 3.726 Period 16 13.578 11.652 32% 40% Periods 0.758 0.714 Period 1 1.331 1.224 Period 2 1.766 1.589 Period 3 2.096 1.849 Period 4 2.345 2.035 Period 5 2.534 2.168 Period 6 2.677 2.263 Period 7 2.925 2.786 2.331 Period 8 3.269 3.543 3.335 3.019 2.868 3.092 2.930 3.147 2.978 2.379 Period 9 2.414 Period 10 2.438 Period 11 3.606 3.387 3.190 3.013 2.456 Period 12 3.912 3.656 3.427 3.223 3.040 2.469 Period 13 3.695 3.459 3.249 3.061 2.478 Period 14 Period 19 15.678 13.134 Period 20 16.351 13.590 Period 21 17.011 14.029 11.158 9.604 8.365 7.366 6.550 11.470 9.818 8.514 7.469 11.764 10.017 8.649 7.562 6.687 5.973 Period 22 17.658 14.451 12.042 10.201 Period 23 18.292 14.857 12.303 10.371 Period 24 18.914 15.247 12.550 10.529 Period 25 19.523 15.622 12.783 10.675 8.772 7.645 8.883 7.718 8.985 7.784 9.077 7.843 Period 26 20.121 15.983 13.003 10.810 9.161 Period 27 20.707 16.330 13.211 10.935 9.237 6.743 6.011 6.792 6.044 6.835 6.073 6.873 6.097 7.896 6.906 6.118 7.943 6.935 6.136 4.524 David no.04.004 46 660 40.406 44 054 0.007 7.004 6064 C450 CCOO 4.070 A COO 3.483 5.668 5.162 4.730 4.357 4.033 3.751 3.503 5.749 5.222 4.775 4.391 4.059 3.771 3.518 3.295 5.818 5.273 4.812 4.419 4.080 3.786 3.529 3.304 3.104 5.877 5.316 4.843 4.442 4.097 3.799 3.539 3.311 3.109 6.623 5.929 5.353 4.870 4.460 4.110 3.808 3.546 3.316 3.113 5.384 4.891 4.476 4.121 3.816 3.551 3.320 5.410 4.909 4.488 4.130 3.822 3.556 3.323 5.432 4.925 4.499 4.137 3.827 3.559 3.325 5.451 4.937 4.507 4.143 3.831 3.562 3.327 3.121 5.467 4.948 4.514 4.147 3.834 3.564 3.329 3.122 5.480 4.956 4.520 4.151 3.837 3.566 3.330 3.123 5.492 4.964 3.567 3.331 3.123 0.004 0404 3.268 3.076 2.484 Period 15 3.283 3.088 2.489 Period 16 3.097 2.492 Period 17 2.494 Period 18 2.496 2.497 Period 20 Period 19 3.116 2.498 Period 21 3.118 2.498 Period 22 3.120 2.499 Period 23 2.499 Period 24 4.154 3.839 A 157 2010 ceo 2.499 Period 25 2.500 Period 26 2.500 Period 27 0500 Print Done Reference Compound Amount of Annuity of $1.00 in Arrears" (Future Value of Annuity) Periods 2% 4% 6% Period 1 1.000 1.000 1.000 1.000 Period 2 2.020 2.040 2.060 2.080 Period 3 3.060 3.122 3.184 3.246 Period 4 4.122 4.246 4.375 4.506 Period 5 5.204 5.416 5.637 5.867 8% 10% 12% 1.000 1.000 2.100 2.120 14% 16% 18% 1.000 1.000 1.000 2.140 2.160 2.180 20% 22% 24% 26% 28% 30% 32% 40% Periods 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Period 1 2.200 2.220 2.240 2.260 2.280 2.300 2.320 2.400 Period 2 3.310 3.374 3.440 3.506 3.572 3.640 3.708 3.778 3.848 3.918 3.990 4.062 4.360 Period 3 4.641 4.779 4.921 5.066 5.215 5.368 5.524 5.684 5.848 6.016 6.187 6.362 7.104 Period 4 6.105 6.610 6.877 7.154 Period 6 6.308 6.633 6.975 7.336 7.716 8.115 8.536 8.977 9.442 Period 7 7.434 7.898 8.394 8.923 9.487 10.089 10.730 11.414 12.142 Period 8 8.583 9.214 9.897 10.637 11.436 12.300 13.233 14.240 15.327 Period 9 9.755 10.583 11.491 12.488 13.579 14.776 16.085 17.519 19.086 Period 10 10.950 12.006 13.181 14.487 15.937 17.549 19.337 21.321 23.521 Period 11 12.169 13.486 14.972 16.645 18.531 20.655 23.045 25.733 28.755 Period 12 13.412 15.026 16.870 18.977 21.384 24.133 27.271 30.850 34.931 Period 13 14.680 16.627 18.882 21.495 24.523 28.029 32.089 36.786 42.219 Period 14 15.974 18.292 21.015 24.215 27.975 32.393 37.581 43.672 50.818 Period 15 17.293 20.024 23.276 27.152 31.772 37.280 43.842 51.660 60.965 Period 16 18.639 21.825 25.673 30.324 35.950 42.753 50.980 60.925 72.939 Period 17 20.012 23.698 28.213 33.750 40.545 48.884 59.118 71.673 87.068 105.931 Period 18 21.412 25.645 30.906 37.450 45.599 55.750 68.394 84.141 103.740 128.117 Period 19 22.841 27.671 33.760 41.446 51.159 63.440 78.969 98.603 123.414 154.740 Period 20 24.297 29.778 36.786 45.762 57.275 72.052 91.025 115.380 146.628 186.688 Period 21 25.783 31.969 39.993 50.423 64.002 81.699 104.768 134.841 174.021 225.026 Period 22 27.299 34.248 43.392 55.457 71.403 92.503 120.436 157.415 206.345 271.031 Period 23 28.845 36.618 46.996 60.893 79.543 104.603 138.297 183.601 244.487 326.237 Period 24 30.422 39.083 50.816 66.765 88.497 118.155 158.659 213.978 289.494 392.484 Period 25 32.030 41.846 54.865 73.106 98.347 133.334 181.871 249.214 342.603 471.981 Period 26 33.671 44.312 59.156 79.954 109.182 150.334 208.333 290.088 405.272 567.377 Period 27 35.344 47.084 63.706 87.351 121.100 169.374 238.499 337.502 479.221 681.853 6.353 7.442 7.740 8.048 8.368 8.700 9.043 9.398 10.946 Period 5 9.930 10.442 10.980 11.544 12.136 12.756 13.406 16.324 Period 6 12.916 13.740 14.615 15.546 16.534 17.583 18.696 23.853 Period 7 16.499 17.762 19.123 20.588 22.163 23.858 25.678 34.395 Period 8 20.799 22.670 24.712 26.940 29.369 32.015 34.895 49.153 Period 9 25.959 28.657 31.643 34.945 38.593 42.619 47.062 69.814 Period 10 32.150 35.962 40.238 45.031 50.398 56.405 63.122 98.739 Period 11 39.581 44.874 50.895 57.739 65.510 74.327 84.320 139.235 Period 12 48.497 55.746 64.110 73.751 84.853 97.625 112.303 195.929 Period 13 59.196 72.035 87.442 69.010 291.347 377.465 469.056 80.496 93.926 109.612 127.913 85.192 100.815 119.347 141.303 104.935 126.011 151.377 181.868 129.020 157.253 191.735 233.791 158.405 195.994 242.585 300.252 371.518 194.254 244.033 306.658 385.323 483.973 237.989 303.601 387.389 494.213 489.110 356.443 617.278 811.999 435.861 582.630 778.771 1040.358 1388.464 532.750 723.461 982.251 1332.659 1806.003 2443.821 650.955 898.092 1238.636 1706.803 2348.803 3226.844 795.165 1114.634 1561.682 2185.708 3054.444 4260.434 971.102 1383.146 1968.719 2798.706 149.240 275.300 Period 14 167.286 197.997 386.420 Period 15 218.472 262.356 541.988 Period 16 285.014 347.309 759.784 Period 17 459.449 1064.697 Period 18 607.472 1491.576 Period 19 630.165 802.863 2089.206 Period 20 633.593 820.215 1060.779 2925.889 Period 21 1067.280 1401.229 4097.245 Period 22 1850.622 5737.142 Period 23 8032.999 Period 24 11247.199 Period 25 15747.079 Period 26 3971.778 5624.772 22046.910 Period 27 02.054 40.000. Co con of a 404 D4D 400.000 30.000.000 500. see 404 040.000. 4740 0 0404 200 FFG GOOD FAGEDAA ZADE COO 20000 74 Print Done - X Reference Compound Amount of $1.00 (The Future Value of $1.00) Periods 2% 4% 6% 8% 10% Period 1 1.020 1.040 1.060 1.080 1.100 12% 14% 1.120 1.140 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% Periods 1.160 1.180 1.200 1.220 1.240 1.260 1.280 1.300 1.320 1.400 Period 1 Period 2 1.040 1.082 Period 3 1.061 1.125 Period 4 1.082 1.170 1.124 1.166 1.210 1.254 1.300 1.346 1.392 1.440 1.488 1.538 1.588 1.638 1.690 1.742 1.960 Period 2 1.191 1.260 1.331 1.405 1.482 1.561 1.643 1.728 1.816 1.907 2.000 2.097 2.197 2.300 2.744 Period 3 1.262 1.360 1.464 1.574 1.689 1.811 1.939 2.074 2.215 2.364 2.520 2.684 2.856 3.036 3.842 Period 4 Period 5 1.104 1.217 1.338 1.469 1.611 1.762 1.925 2.100 2.288 2.488 2.703 2.932 3.176 3.436 3.713 4.007 5.378 Period 5 Period 6 1.126 1.265 1.419 1.587 1.772 1.974 2.195 2.436 2.700 2.986 3.297 3.635 4.002 4.398 4.827 5.290 7.530 Period 6 Period 7 1.149 1.316 1.504 1.714 1.949 2.211 2.502 2.826 3.185 3.583 4.023 4.508 5.042 5.629 6.275 6.983 10.541 Period 7 Period 8 1.172 1.369 Period 9 1.195 1.423 Period 10 1.219 1.480 1.594 1.851 2.144 2.476 2.853 3.278 3.759 4.300 4.908 5.590 6.353 7.206 8.157 9.217 14.758 Period 8 1.689 1.999 2.358 2.773 3.252 3.803 4.435 5.160 5.987 6.931 8.005 9.223 10.604 12.166 20.661 Period 9 1.791 2.159 2.594 3.106 3.707 4.411 5.234 6.192 7.305 8.594 10.086 11.806 13.786 16.060 28.925 Period 10 Period 11 1.243 1.539 1.898 2.332 2.853 3.479 4.226 5.117 6.176 7.430 8.912 10.657 12.708 15.112 17.922 21.199 40.496 Period 11 Period 12 1.268 1.601 Period 13 1.294 1.665 Period 14 1.319 1.732 Period 15 1.346 1.801 Period 16 1.373 1.873 Period 17 1.400 1.948 Period 18 1.428 2.026 Period 19 1.457 2.107 Period 20 1.486 2.191 Period 21 1.516 2.279 Period 22 1.546 2.370 2.012 2.518 3.138 2.133 2.261 2.397 2.720 3.452 4.363 2.937 3.797 4.887 Period 23 1.577 2.465 Period 24 1.608 2.563 Period 25 1.641 2.666 Period 26 1.673 2.772 Period 27 1.707 2.883 3.820 4.049 5.936 7.288 6.886 8.599 6.261 7.988 10.147 3.172 4.177 5.474 7.138 9.266 11.974 2.540 3.426 4.595 6.130 8.137 10.748 14.129 2.693 3.700 5.054 6.866 9.276 12.468 16.672 2.854 3.996 5.560 7.690 10.575 14.463 19.673 3.026 4.316 6.116 8.613 12.056 16.777 23.214 3.207 4.661 6.727 9.646 13.743 19.461 27.393 3.400 5.034 7.400 10.804 15.668 22.574 32.324 3.604 5.437 8.140 12.100 17.861 26.186 38.142 5.871 8.954 13.552 20.362 30.376 45.008 6.341 9.850 15.179 23.212 35.236 53.109 4.292 6.848 10.835 17.000 26.462 40.874 62.669 4.549 7.396 11.918 19.040 30.167 47.414 73.949 4.822 7.988 13.110 21.325 34.390 55.000 87.260 3.896 4.818 10.872 13.215 16.012 5.492 16.386 20.175 25.421 19.742 25.196 31.243 32.030 40.358 50.851 64.072 8.916 10.699 13.264 12.839 16.182 20.319 15.407 18.488 24.086 22.186 29.384 38.741 26.623 35.849 48.039 85.071 112.455 31.948 43.736 59.568 80.731 108.890 146.192 195.391 38.338 53.358 73.864 101.721 139.380 190.050 257.916 46.005 65.096 91.592 128.169 178.406 247.065 55.206 79.418 113.574 161.492 228.360 321.184 66.247 96.889 140.831 203.480 79.497 118.205 174.631 256.385 374.144 95.396 144.210 216.542 323.045 478.905 705.641 114.475 175.936 268.512 407.037 612.998 917.333 1364.339 137.371 214.642 332.955 512.867 784.638 1192.533 1800.927 19.343 23.298 27.983 56.694 Period 12 24.759 30.288 36.937 79.371 Period 13 31.691 39.374 48.757 111.120 Period 14 40.565 51.186 64.359 155.568 Period 15 51.923 66.542 84.954 217.795 Period 16 66.461 86.504 112.139 148.024 304.913 426.879 Period 17 Period 18 597.630 Period 19 836.683 Period 20 340.449 1171.356 Period 21 449.393 1639.898 Period 22 292.300 417.539 593.199 2295.857 Period 23 542.801 783.023 3214.200 Period 24 1033.590 4499.880 Period 25 6299.831 Period 26 8819.764 Period 27 400.000 Print Done