Requirement 1:
Benefit
Correct Option is Option C - Easy to understand and captures uncertainty about expected cashflow in later years of the project
Disadvantage:
Correct Option is Option D - All of the above
Now We will be finding the cumulative cashflows over years.
Project A | ||
Initial Investment | 30,00,000 | |
year | Cashflow | Cumulative Cashflow |
1 | 10,00,000 | 10,00,000 |
2 | 10,00,000 | 20,00,000 (1000000 + 1000000) |
3 | 10,00,000 | 30,00,000 (2000000 + 1000000) |
4 | 10,00,000 | 40,00,000 |
So in year 3 we get all the invested money back i.e. $ 3000000
Hence, total payback period = 3 Years
Project B | ||
Initial Investment | 15,00,000 | |
year | Cashflow | Cumulative Cashflow |
1 | 4,00,000 | 4,00,000 |
2 | 9,00,000 | 13,00,000 (400000 + 900000) |
3 | 8,00,000 | 21,00,000 (1300000 + 800000) |
So in year 2 we get $ 1,300,000 money back of the invested money $
1,500,000
So remaining money (1500000 - 1300000 ) = $ 200,000 needs to retrieved from year 3.
Now, in year 3 we are earning $ 800,000
Hence, to earn $ 200000, it will take = $ 200000 / 800000 = 0.25 Years
Hence, total payback period = Year 2 + 0.25 (Year 3) = 3.25 Years
Project C | ||
Initial Investment | 40,00,000 | |
year | Cashflow | Cumulative Cashflow |
1 | 20,00,000 | 20,00,000 |
2 | 20,00,000 | 40,00,000 |
3 | 2,00,000 | 42,00,000 |
4 | 1,00,000 | 43,00,000 |
So in year 2 we get all the invested money back i.e. $ 4000000
Hence, total payback period = 2 Years
Hence, payback period of Project C is minimum.
Thus, we should choose Project C on the basis of Payback period
----------------------------------------
Requirement 2
NPV is given by:
For Project A
NPV = [1000000 / (1 + 10%)^1] + [1000000 / (1 + 10%)^2] + [1000000 / (1 + 10%)^3] + [1000000 / (1 + 10%)^4] - Initial Investment
NPV = 909090.91 + 826446.28 + 751314.80 + 683013.46 - 3000000
NPV = $ 169865.45 = $ 169865
For Project B
NPV = [400000 / (1 + 10%)^1] + [900000 / (1 + 10%)^2] + [800000 / (1 + 10%)^3] - Initial Investment
NPV = 363636.36 + 743801.65 + 601051.84 - 1500000
NPV = $ 208489.86 = $ 208490
For Project C
NPV = [2000000 / (1 + 10%)^1] + [2000000 / (1 + 10%)^2] + [200000 / (1 + 10%)^3] + [100000 / (1 + 10%)^4] - Initial Investment
NPV = 1818181.82 + 1652892.56 + 150262.96 + 68301.35 - 4000000
NPV = - $ 310361.31 = - $ 310361
---------------------------------
Requirement 3
The NPV method is generally regarded as the preferred method for project selection process, therefore the company should consider investing in the project with a Positive NPV (If only one project can be selected then select with highest NPV).
Since the company is limited by the total dollar value of capital investments (resources) it can make during the year, they should choose the investment with Highest Positive NPV.
Prior to making a final decision. The company should also consider the non financial qualitative factors of investment such as worker safety issues and customer satisfaction
Using only the NPV calculations from requirement 2, Andrew should invest in Project B
i need help Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment...
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 Babson, staff analyst at
Halls, is preparing an analysis of the three projects under
consideration by Corey Halls, the company's owner.
Homework: Chapter 21 Homework Save Score: 0.2 of 3 pts 7 9 of 12 (10 complete) HW Score: 52.67%, 15.8 of 30 pts %E21-27 (similar to) Question Help i Data Table...
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Carmen Corporation has the following financial statements: Table 1 CARMEN COMPANY Balance Sheet 12/31/2005 Assets Liability & Equity Cash $6,000,000 Account Payable $1,000,000 Account Receivable $8,000,000 Notes Payable $3,000,000 Inventory $3,000,000 Accrued Taxes $1,000,000 Current Asset $17,000,000 Current Liabilities $5,000,000 GFA $40,000,000 Long-term debt $10,000,000 Accumulated Depreciation ($2,000,000) Preferred Stock (0.5 million shares) $15,000,000 Net Fixed Assets $38,000,000 Common Stock (1 million shares) $10,000,000 Returned Earnings $15,000,000 Common Equity $25,000,000 Total Asst $55,000,000 Total Liability & Equity $55,000,000 Table 2...