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(Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $11 million. The projects are independent and have the costs and profitability indexes associated with them shown in the popup window: a. Under strict capital rationing, which projects should be selected? b. What problems are there with capital rationing? MCKEN a. Under strict capital rationing, which projects should be selected? (Select the best choice below.) OA. Projects C and F B. Projects D and G OC. Projects C and D OD. Projects D, F and OE. Projects C, D and G Data table (Click on the following icon in order to copy its contents into a spreadsheet.) PROFITABILITY INDEX COST $3,000,000 1.15 2,000,000 1.06 1.34 1.36 6,000,000 5,000,000 3,000,000 6,000,000 1.16 1.25 4,000,000 1.12 PROJECT A ABCDEFG C Bool 1 X Question Viewer

Q.Because the company’s cash is limited, Andrews thinks the payback method should be used to choose between the capital budgeting projects.a. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Andrews choose?

Answer the given question with a proper explanation and step-by-step solution. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%.     0 1 2 3 4                       Project A -1,000 600 440 210 260 Project B -1,000 200 375 360 710   What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. ____ years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. ______ years What is Project B's payback? Do not round intermediate…

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2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Falcon Freight: Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight’s WACC is 7%, and project Sigma has the same risk as the firm’s average project.   The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $400,000 Year 3 $500,000 Year 4 $400,000   Which of the following is the correct calculation of…

From the problem below :1. For capital budgeting purposes, what is the net investment in the new, high-performing machine?A. P186,400B. P185,000C. P169,600D. P148,000 2. What is the payback period?A. 4.49 yearsB. 5.24 yearsC. 5.76 yearsD. None from the choices 3. Compute the new, high-performing machine's net present value.A. P1,200B. P15,892C. P28,025D. P6,729

A company is considering three alternative investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects Present value of net cash flows (excluding initial investment) Initial investment Project A $ 11,226 (10,000) Project B $ 10,568 (10,000) a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will it accept? c. If the company can choose only one project, which will it choose on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Required C Compute the net present value of each project. Potential Projects Project A Project B Project C Present value of net cash flows Initial investment Net present value $ $ $

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You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below. Expected Net Cash Flows Year Project X Project Y 0 – $10,000 – $10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500   Use the Homework Student Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). Which project or projects should be accepted if they are independent? Which project or projects should be accepted if they are mutually exclusive?

You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below. Expected Net Cash Flows Year Project X Project Y 0 – $10,000 – $10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500   Which project or projects should be accepted if they are independent? Which project or projects should be accepted if they are mutually exclusive?

Consider two investment projects, which both require an upfront investment of $9 million, and both of which pay a constant positive amount each year for the next 9 years. Under what conditions can you rank these projects by comparing their IRRS? (Select the best choice below.) O A. There are no conditions under which you can use the IRR to rank projects. O B. Ranking by IRR will work in this case so long as the projects' cash flows do not decrease from year to year. O C. Ranking by IRR will work in this case so long as the projects' cash flows do not increase from year to year. O D. Ranking by IRR will work in this case so long as the projects have the same risk.

The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $425,000 Year 4 $475,000   Happy Dog Soap Company’s weighted average cost of capital is 8%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? $1,226,950   $776,950   $893,492   $1,251,950     Making the accept or reject decision Happy Dog Soap Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should    project Alpha.…

The management of Winstead Corporation is considering the following three investment projects (Ignore income taxes.):     Project Q Project R Project S Investment required $ 57,200 $ 97,200 $ 176,000 Present value of cash inflows $ 62,092 $ 111,792 $ 193,320   The only cash outflows are the initial investments in the projects.   Required: Rank the investment projects using the project profitability index.

A company is considering a 10-year capital investment project. The project has annual positive cash flows each year. The accounting manager has calculated the NPV of the same project using three different costs of capital (8%, 10% and 18 %) as discount rates. Select the most logical combination of NPVS from the choices given. Note: You cannot calculate the NPVS nor do you need to. O $(5,743) $3,152 $6,612 O $(5,743) $6,612 $3,152 $3,152 $6,512 $(5,743) O $6,512 $3,152 $(5,743) O None of the above

A company wants to decide which project to undertake out of two projects A and B.  For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company.  Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method.  Show all your work for each method step by step.     Initial Investment and Cash Flows of Projects A and B in AED   Project A Project B Initial Investment - 150,000 - 150,000 Year 1 Cash flow 20,000 50,000 Year 2 Cash flow 90,000 90,000 Year 3 Cash flow 70,000 60,000

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