Reference no: EM13341181

Capital Investment Decisions

Starbuck Construction is analysing its capital expenditure proposals for the purchase of equipment in the coming year. 

The capital budget is limited to $6,000,000 for the year.

 

	Project A	Project B	Project C
Projected cash outflow
Net initial investment	$3,000,000	$1,500,000	$4,000,000
Projected cash inflows
Year 1	$1,000,000	$400,000	$2,000,000
Year 2	$1,000,000	$900,000	$2,000,000
Year 3	$1,000,000	$800,000	$200,000
Year 4	$1,000,000		$100,000
Required rate of return	11%	11%	11%

 

REQUIRED:

 

(a)    Payback period method.

               i.            Discuss the benefits and limitations of the payback period method. 

             ii.            Calculate the payback period for each of the three projects. Show all workings

           iii.            Using these payback period calculations, discuss which of the three projects, if any, should be undertaken. 

(b)   NPV method.

                    i.            Discuss the benefits and limitations of the NPV method. 

                  ii.            Calculate the NPV for each of the three projects. (assume all cash flows occur at the end of the year except for initial investment amounts)

                iii.            Using these NPVcalculations, discuss which of the three projects, if any, should be undertaken.