Question
McGloire 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
McGloire 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. Lori Alleyne, staff analyst at McGloire's, is preparing an analysis of the three projects under consideration by Joyanne McGloire, the company's owner.
A B C D 1 Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3 000 000 $1 500 000 $4 000 000 4 5 Projected cash inflows 6 Year 1 $1 000 000 $ 400 000 $2 000 000 7 Year 2 1 000 000 900 000 2 000 000 8 Year 3 1 000 000 800 000 200 000 9 Year 4 1 000 000 100 000 10 11 Required rate of return 10% 10% 10%
1. Because the company's cash is limited, McGloire thinks the paybackmethod should be used to choose between the capital budgeting projects.
a. List two benefits and two 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 McGloire choose and why?
2. Alleyne 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. Using both Payback and NPV results, which projects, if any, would you recommend McGloire should fund? Justify your answer and include a critical assessment of two nonfinancial qualitative factors that could affect the investment.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started