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Calculate the npv for each of the three projects

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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.

Reference no: EM13341181

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