Question

Hafners Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year The capital budget is limited to $7.000,000 for the year Larissa Brown, staff analyst at Hafners, is preparing an analysis of the three projects under consideration by Cullin Hafners, the company's owner (cck the icon to view the data for the tree projects ) D (Click the icon to view the Future Value of $1 factors) (Click the icon to view the Future Value of Annuity of $1 factors) (Click the icon to view the Present Value of $1 factors ) (Click the icon to view the Present Value of Annuty of $1 factors,) the Read the tequirements fners thinks the payback method should be used to choose between the capital budgeting 1 Calculate the payback period for each of the three projects. ignore income taxes. (Round your answers to two 000 Project A 200years 000 Projct B 283 years 000 1 Project C 1.90 years Data Table Using the payback method, which project(s) should Hatners choose? Project c Project C Project B Project A Projected cash outflow 4.200.0005 2.400.000 $ 5,000,000 Net iritial investment low Projected cash inflows 2.0000005 700,000 S 2,600,000 Year 1 0,000 2,000,000 1,200,000 2,600.000 Year 2 0,000 2000,000600,000 200000 100,000 0.83 ye Year 3 2,000,000 Year 4 2.83 Y 6% 6% 6% Required rate of retun Print Done

Answer 1

Ans:

Payback period
Project A
Year	Cash flows	Cummulative cash flows
0	-4200000	-4200000
1	2000000	-2200000
2	2000000	-200000
3	2000000	1800000
4	2000000	3800000

Payback period = A + B/C

a = year before where cash flow become positive

b = cummulative amount in the year where amount become positive

c = total amount of cash flow in the year where amount become positive

Payback period = 2 + 1800000 / 2000000

= 2.9 years

Payback period
Project B
Year	Cash flows	Cummulative cash flows
0	-2400000	-2400000
1	700000	-1700000
2	1200000	-500000
3	600000	100000

Payback period = 2 + 100000 / 600000

= 2.167 years

Payback period
Project C
Year	Cash flows	Cummulative cash flows
0	-5000000	-5000000
1	2600000	-2400000
2	2600000	200000
3	200000	400000
4	100000	500000

Payback period = 1 + 200000/2600000

= 1.076 years

Project C need to be selected