Assignment 3-1

ACC-550 Cost Accounting

Module Three Homework

6. Fitzgibbions 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. Lori Bickerson, staff analyst at Fitzgibbions, is preparing an analysis of the three projects under consideration by Corey Fitzgibbions, the company's owner.

Requirement 1. Because the company's cash is limited, Fitzgibbions thinks the payback method should be used to choose between the capital budgeting projects.

a. What are the benefits and limitations of the payback method to choose between the projects?

Limitations of the payback method:

b. Calcalate the payback period for each of the three projects. Ignore income taxes. (Round your answers to two decimal places.)

Project A years

Project B Years

Project C Years

Using the payback method, which project(s) should Fitzgibbions choose? (1) _________

Requirement 2. Calculate the NPV for each project. Ignore income taxes. (Round rour answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present values.)

The NPV of project A is $

The NPV of project B is $

The NPV of project C is $

Requirement 3. Which projects , if any would you recommend funding? Briefy explain why.

The (2)___________ method is generally regarded as the preferred method for project selection decisions, therefore, the company should consider investing in the project(s) with (3)____________

Since the company's is limited by the (4)_____________ it can make during the year, if more than one project fits this criteria, they should choose the investment(s) with the (5)__________ Prior to making a final decision, the company should also consider the nonfinancial qualitative factors of the investments such as the (6)__________

Using only the NPV calculations from requirements 2, Fitzgibbions should invest in (7) _________

1: Data Table

Project A Project B Project C

Projected cash outflow

Net initial investment $ 5,100,000 $ 5,000,000 $ 6,000,000

Projected cash inflows

Year 1 $ 2,750,000 $ 3,200,000 $ 3,200,000

Year 2 2,750,000 1,400,000 3,200,000

Year 3 2,750,000 1,200,000 250,000

Year 4 2,750,000 125,000

Required rate of return 8% 8% 8%