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Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your
Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital-budgeting analysis department or are provided with remedial training. The memorandum you received outlining your assignment follows To: New Financial Analysts From: Mr. V. Morrison, CEO, Caledonia Products Re: Capital-Budgeting Analysis Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to Caledonia's highly successful Avalon product line, and as a result, the required rate of return on both projects has been established at 11 percent. The expected free cash flows from each project are shown in the popup window: In evaluating these projects, please respond to the following questions Data Table d. What are the criticisms of the payback period? (Select all that apply.) A. The selection of the maximum acceptable payback period is arbitrary B. The method does not take into account the time value of money PROJECTA PROJECT B C. It is consistent with the firm's goal of shareholder wealth maximization Initial outlay Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 -$110,000 30,000 40,000 30,000 50,000 60,000 -$110,000 40,000 40,000 40,000 40,000 40,000 D. The method ignores cash flows occurring after the payback period Click to select your answer(s) Save for Later
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