Reference no: EM132517433

McGloire 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 Alleyne, staff analyst at McGloire's, is preparing an analysis of the three projects under consideration by Joyanne McGloire, the company's owner.

                                                            Project A                        Project B                          Project C

Net initial investment                         $3 000 000              $1,500,000                4,000,000

Projected cash inflows

Year 1                                                   $1 000 000             400,00                 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                                 10%                    10%                          10%

Question 1. Because the company's cash is limited, McGloire thinks the payback method should be used to choose between the capital budgeting projects.

a. List two benefits and two limitations of using the payback method to choose between projects?

b. Calculate the payback period for each of the three projects Ignore income taxes. Using the payback method, which projects should McGloire choose and why?

Question 2. Alleyne 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.