Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
CAPITAL BUDGETING - MINI CASE STUDY
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are shown. Each investment has a 6-year expected useful life and no salvage value.
|
|
Payback Period
|
IRR
|
Investment Cost
|
|
Project A1
|
4.2
|
10.5%
|
$130,000
|
|
Project B2
|
5.9
|
5.1%
|
67,000
|
|
Project C3
|
5.0
|
13.4%
|
83,000
|
|
Project D4
|
4.8
|
7.4%
|
61,000
|
|
Project E5
|
3.2
|
12.1%
|
115,000
|
|
Project F6
|
4.0
|
9.9%
|
65,000
|
|
Project G7
|
6.3
|
9.8%
|
76,000
|
- Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable.
- Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order?
- If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
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