Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa Bickerson, staff analyst at Lulus, is preparing an analysis of the three projects under consideration by Caden Lulus, the company's owner. (Click the icon to view the data for the three projects.) Present Value of $1 table Read the requirements. Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table 3 D ect A Project B Project C 00,000 $4,000,000 $8,000,000 50,000 $ 1,100,000 $ 4,700,000 50,000 2,300,000 4,700,000 50,000 700,000 50,000 50,000 25,000 8% 8% 2% X Requirements 1. Because the company's cash is limited, Lulus thinks the payback method should be used to choose between the capital budgeting projects. a. What are the benefits and 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 Lulus choose? 2. Bickerson 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. Which projects, if any, would you recommend funding? Briefly explain why. Print Done

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
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✔Question 1
Data table
A
1
2 Projected cash outflow
3 Net initial investment
4 Projected cash inflows
5 Year 1
6 Year 2
7
Year 3
8 Year 4
9 Required rate of return
↑
Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa
Bickerson, staff analyst at Lulus, is preparing an analysis of the three projects under consideration by Caden Lulus, the company's owner.
(Click the icon to view the data for the three projects.)
Present Value of $1 table
Read the requirements.
B
Project A
с
Project B
Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table
D
Project C
$ 6,000,000 $ 4,000,000 $8,000,000
8%
$ 2,050,000 $ 1,100,000 $4,700,000
2,050,000 2,300,000 4,700,000
2,050,000 700,000 50,000
2,050,000
25,000
8%
8%
Requirements
1. Because the company's cash is limited, Lulus thinks the payback method should be used to choose between the
capital budgeting projects.
What are the benefits and limitations of using the payback method to choose between projects?
Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method,
which projects should Lulus choose?
a.
b.
2.
Bickerson 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. Which projects, if any, would you recommend funding? Briefly explain why.
Print
Done
Clear all
Check answer
Transcribed Image Text:Question list ✔Question 1 Data table A 1 2 Projected cash outflow 3 Net initial investment 4 Projected cash inflows 5 Year 1 6 Year 2 7 Year 3 8 Year 4 9 Required rate of return ↑ Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa Bickerson, staff analyst at Lulus, is preparing an analysis of the three projects under consideration by Caden Lulus, the company's owner. (Click the icon to view the data for the three projects.) Present Value of $1 table Read the requirements. B Project A с Project B Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table D Project C $ 6,000,000 $ 4,000,000 $8,000,000 8% $ 2,050,000 $ 1,100,000 $4,700,000 2,050,000 2,300,000 4,700,000 2,050,000 700,000 50,000 2,050,000 25,000 8% 8% Requirements 1. Because the company's cash is limited, Lulus thinks the payback method should be used to choose between the capital budgeting projects. What are the benefits and limitations of using the payback method to choose between projects? Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Lulus choose? a. b. 2. Bickerson 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. Which projects, if any, would you recommend funding? Briefly explain why. Print Done Clear all Check answer
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