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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
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? 2. Bobo 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. Andrews 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 ye analyst at Andrews, is preparing an analysis of the three projects under consideration by Calvin Andrews, the company's owner. (Click the icon to view the data for the three projects.) Read the 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: A. Utilizes the time value of money and computes each project's unique rate of return B. Indicates whether or nol the project will earn the company's minimum required rate of return C. Easy to understand and captures uncertainty about expected cash flows in later years of a project D. All of the above Limitations of the payback method: A. Cannot be used for projects with unequal periodic cash flows B. Fails to incorporate the time value of money and does not consider a project's cash flows after the payback period C. Cannot be used when management's required rate of return varies from one period to the next. 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
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