Requirements1.2.3.Because the company's cash is limited, Lulus thinks the payback method should be used to choose between thecapital 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?Bickerson thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of theyear except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes.Which projects, if any, would you recommend funding? Briefly explain why.X 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 Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 tableRead the requirements.Requirement 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?Benefits of the payback method:O A. Easy to understand and captures uncertainty about expected cash flows in later years of a projectO B. Utilizes the time value of money and computes each project's unique rate of returnOC. Indicates whether or not the project will earn the company's minimum required rate of returnO D. All of the above

PAYBACK PERIOD Payback period is the period in which money invested in capital asset is recovered…

Requirement 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? Benefits of the payback method: OA. Easy to understand and captures uncertainty about expected cash flows in later years of a project OB. Utilizes the time value of money and computes each project's unique rate of return OC. Indicates whether or not the project will earn the company's minimum required rate of return O D. All of the above

Requirement 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? Benefits of the payback method: OA. Easy to understand and captures uncertainty about expected cash flows in later years of a project OB. Utilizes the time value of money and computes each project's unique rate of return OC. Indicates whether or not the project will earn the company's minimum required rate of return O D. All of the above

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year Cash flows r=13.00% 20.64% 18.35% 21.50% 19.32% 22.78% 0 -$1,000 1 $750 2 $600 3 $120
. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000…
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Which of the following statements is FALSE? A. When evaluating a capital budgeting decision, we generally include interest expense. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. C. Many projects use a resource that the company already owns. O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
What is the Modified Internal Rate of Return (MIRR) Select one: The opposite of NPV A reinvestment rate to account for positive cash flows reinvested into a project An approach to discounting The finance rate of a project
2) D&D is analyzing a project with the provided cash flow information. Can you calculate the project's internal rate of return (IRR)? Keep in mind that the IRR of a project can be lower than the weighted average cost of capital (WACC) or even negative, in which case the project should be rejected. Year Cash flows 0 -$1,000 1 $425 2 $425 3 $425
The capital budgeting decision that requires a choice between two decisions is a(n) _______ project. Independent Dependent Mutually exclusive Inclusive The actual value that a firm loses when it makes a capital budgeting decision is a(n) ______ cost Fixed Opportunity Sample Unknown The number of years required for an investment to return the monies invested is known as a projects Economic life Usage rate Capital decision Payback period The future benefits received from investing in a project are the projects Net cash flows Net investment Net cost Net return The capital components included in a firms weighted cost of capital are Common stock Debt Retained earnings All of the above Weaknesses in using solely the payback method as a measure of a projects risk include Not accounting for the time value of money There is no objective criterion for deciding what is an acceptable payback period Cash flows that occur after the payback period have no impact on the…
3. A. B. C. time Capital Budgeting Project S Project L D. 0 -1000 -1000 1 500 100 2 400 200 3 300 300 4 200 400 5 100 500 USE NPV METHOD, assuming the WACC is 10%. Which project will you invest? Use IRR method, which project will you invest? Assuming WACC is 10%, use MIRR, which project will you invest? Use payback period method, which project will you invest?
Which of the following statements is true regarding the payback period? Multiple Choice It measures the length of time that it takes for a project to recover its initial cost from the discounted net cash inflows that it genera It measures the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates. It measures the length of time that it takes for a project to recover its initial cost from the incremental net operating income that It measures the length of time that it takes for a project to recover its initial cost from the discounted incremental net operating it generates.
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Barry company is considering a project that has the following cash flow and WACC data. what is the projects NPV? Note that you should use the WACC as the discount rate
Incremental cash flows: a. refer to only cash flows which occur at the end of a project b. are cash flows which change if you proceed with the project c. refer to only cash flows which occur at the start of a project d. are never included in capital budgeting analysis e. refer to the existing cash flows of the business