Reference no: EM133151201

Question - Davis Industries is a discount retailer of shoes, operating a chain of approximately 192 stores in the United States. The chain's stores feature self-service fixtures displaying more than 50,000 pairs of shoes at its retail stores. The company is choosing between a gas-powered and an electric-powered forklift truck for moving materials in its factory to replace its obsolete equipment. Because both forklifts perform the same function, the firm will choose only one i.e., they are mutually exclusive investments. The company categorizes its projects and analyzes capital budgeting projects under asset replacement to reduce costs, expansion into new markets to increase market share, safety & environmental projects to comply with regulations. Last year, management of Davis Industries placed a constraint on the size of the firm's capital budget for lack of money and inadequate personnel. The cost of capital is 10%. The director of capital budgeting has provided the expected cash flows of the machines as follows:

	Expected Net Cash Flows
Year	Project A	Project B
0	($50,000)	($50,000)
1	25,000	15,000
2	20,000	15,000
3	10,000	15,000
4	5,000	15,000
5	5,000	15,000

1. Identify the major project classification categories for Davis Industries and why they are used.

2. Which project classification require the least detailed and the most detailed analyses in the capital budgeting process?

3. Distinguish between independent and mutually exclusive projects for Davis Industries.

4. Calculate the payback period and profitability index for each machine.

5. Calculate net present value (NPV) and internal rate of return (IRR) for each machine.

6. Using the NPV technique, which machine should be recommended?

7. If the purchase of the machine A and machine B are independent projects, which project should be accepted?

8. Explain capital rationing.

9.  Identify three explanations for capital rationing.

10. How can Davis Industries handle its capital rationing situations?