Clarabelles Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lenora Bickerson, staff analyst at Clarabelles, is preparing an analysis of the three projects under consideration by Cullin Clarabelles, the company's owner. E (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 Data Table Read the requirements Requirements Project A Project B Project C Projected cash outflow $ 3,000,000 $ 2,100,000 $ Net initial investment 3,000,000 1. Because the company's cash is limited, Clarabelles thinks the payback method should be used to choose between the capital budgeting projects. What are the benefits and limitations of using the payback method to choose between projects? Projected cash inflows a. b. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Clarabelles choose? $ 1,200,000 $ 1,200,000 $ Year 1 1,700,000 600,000 1,200,000 Year 2 1,700,000 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. 1.200.000 200.000 Year 3 500,000 3. Which projects, if any, would you recommend funding? Briefly explain why. Year 4 1,200,000 100.000 Print Done Required rate of return 6% 6% 6% Save for Later Requirement 1. Because the company's cash is limited, Clarabelles 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 O B. Easy to understand and captures uncertainty about expected cash flows in later years of a project OC. Utilizes the time value of money and computes each projects unique rate of return O D. All of the above Limitations of the payback method: Full-screen Snip O A. Cannot be used for projects with unequal periodic cash flows O B. Cannot be used when management's required rate of return varies from one period to the next. OC. Fails to incorporate the time value of money and does not consider a project's cash flows after the payback period O D. All of the above b. Calculate 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 Clarabelles choose? Full-screen Snip Requirement 2. Calculate the NPV for each project. Ignore income taxes. (Round your 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? Briefly explain why. V method is generally regarded as the preferred method for project selection decisions, therefore, the company should consider investing in the project(s) with The Since the company's is limited by the it can make during the year, if more than one project fits this criteria, they should choose the investment(s) with the Prior to making a final decision, the company should also consider the nonfinancial qualitative factors of the investments such as the Using only the NPV calculations from reguirement 2, Clarabelles should invest in
