Question

This for my Managerial Accounting Course kindly Type in order for me to Copy and Paste

1 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.

	A	B	C	D
01		Project A	Project B	Project C
02	Projected Cash Outflow
03	Net Initial Investment	$3,000,000	$1,500,000	$4,000,000
04
05	Projected Cash Inflows
06	Year 1	$1,000,000	$400,000	$2,000,000
07	Year 2	$1,000,000	$900,000	$2,000,000
08	Year 3	$1,000,000	$800,000	$ 200,000
09	Year 4	$1,000,000		$ 100,000
10
11	Required Rate of Return	10%	10%	10%

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? (2 mark)

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.

3. Using both Payback and NPV results, which projects, if any, would you recommend McGloire should fund? Justify your answer and include a critical assessment of two nonfinancial

qualitative factors that could affect the investment.

Answer 1

Solutions:

	Project A	Project B	Project C
Payback Period	3 years	2.25 Years	2 years
NPV	169865.45	208489.86	-378662.66

b. Based on the payback period, the company will go in for Project C as it has the least payback period of 2 years.

3. Based on NPV and Payback, the company should go in for Project A and Project B. They have a positive NPV and payback period is also fair enough. The total investment these projects are $4,500,000 ($3000,000+$1,500,000) is also within the capital budget funds of $5,000,000.

The company must for sure avoud investing in Project C. Eventhough the payback period is the least, it does not meet the required return of 10% and provides a negative NPV.

Workings:

PayBack Period
Year	Project A	Cummulative Cash Flow
0	-3000000
1	1000000	1000000
2	1000000	2000000
3	1000000	3000000
4	1000000	4000000
Pay Back Period	3 years
Year	Project B	PV Factor @ 10%
0	-1500000	1.00000
1	400000	400000
2	900000	1300000
3	800000	2100000
Payback Period = 2 + (1500000-1300000)/800000	=2+.25	2.25 Years
Year	Project C	PV Factor @ 10%
0	-4000000	1.00000
1	2000000	2000000
2	2000000	4000000
3	200000	4200000
4	100000	4300000
Payback Period	2 years

NPV
Year	Project A	PV Factor @ 10%	PV of Cash Flows
0	-3000000	1.00000	-3000000.00
1	1000000	0.90909	909090.91
2	1000000	0.82645	826446.28
3	1000000	0.75131	751314.80
4	1000000	0.68301	683013.46
Total	4000000		3169865.45
Less: Initial Investment			3000000
NPV			169865.45
Year	Project B	PV Factor @ 10%	PV of Cash Flows
0	-1500000	1.00000	-1500000.00
1	400000	0.90909	363636.36
2	900000	0.82645	743801.65
3	800000	0.75131	601051.84
Total	2100000		1708489.86
Less: Initial Investment			1500000.00
NPV			208489.86
Year	Project C	PV Factor @ 10%	PV of Cash Flows
0	-4000000	1.00000	-4000000.00
1	2000000	0.90909	1818181.82
2	2000000	0.82645	1652892.56
3	200000	0.75131	150262.96
4	100000	0.68301	68301.35
Total	4200000		3621337.34
Less: Initial Investment			4000000.00
NPV			-378662.66

PS: Kindly post multiple questions individually. Have calculated the NPV and Payback for you.