Layhee’s Construction is analyzing its capital expenditure proposals for the pur
ID: 2560908 • Letter: L
Question
Layhee’s Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited $10,000,000 for the year. Ricky, staff analyst at Layhee's, is preparing an analysis of the three projects under consideration by Mr. Layhee, the company's owner.
*Three project's data
*Future value of $1 factors
* Present value of $1 factors
***Because the company's cash is limited, Layhee’s thinks the payback method should be used to choose between the capital budgeting projects.
Requirements:
1. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Layhee’s choose?
2. Ricky 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.
Project A Project B Project C Projected cash outflow Net initial investment $ 5,100,000 $ 5,000,000 $ 6,000,000 Projected cash inflows Year 1 Year 2 Year 3 Year 4 $2,750,000 3,200,000 $ 3,200,000 2,750,000 1,400,000 3,200,000 2,750,000 1,200,000 250,000 125,000 2,750,000 Required rate of returrn 8% 8% 6%Explanation / Answer
Payback period = Completed Year + Remaining Amt./ Available amt.
Calculation of payback period are as follows -
based on payback peiod layhee would choose project A as its has lower payback period.
Computation of present value of all three projects -
as project A has high NPV so layhee would choose project A.
3. i would choose project A for investment as it has higher NPV and lower payback period than other two project.
i can invest in project B also two times but its NPV is not enough to meet project A NPV so would choose project A only.
Please note all values arein $.
In case of any clarification required please comment.
Project A Year 0 1 2 3 4 Cash Flows -5100000 2750000 2750000 2750000 2750000 Cum. Cash flow -5100000 -2350000 400000 3150000 5900000 Payback period = 1+(-2350000)/(-2350000-400000)*12 0.854545 10.25455 months so payback period = 1 year and 10.25 month Project B Year 0 1 2 3 Cash Flows -5000000 3200000 1400000 1200000 Cum. Cash flow -5000000 -1800000 -400000 800000 Payback period = 2+(-400000)/(-400000-800000)*12 4 months payback peiod = 2 years and 4 months Project C Year 0 1 2 3 4 Cash Flows -6000000 3200000 3200000 250000 125000 Cum. Cash flow -6000000 -2800000 400000 650000 775000 Payback period = 1+(-2800000)/(-2800000-400000)*12 10.5 months Payback period = 1 year and 10.5 monthRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.