You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to
analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of
return for each is 12%, determine for each project (a) the payback period, (b) the net present value,
(c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in
the three-year property class and that the corporate tax rate is 25 percent. You are limited to a
maximum expenditure of $3000 only for this capital budgeting period. Which projects you will
accept and why? Justify your suggestions
Project A
Project B
Project C
Project D
Project E
Project F
Investment
-1000
-1000
-1000
-1000
-1000
-1000
1
150
200
250
800
900
1000
2
350
300
250
350
300
200
3
400
500
600
200
150
100
4
700
650
600
200
150
50
12 Capital Budgeting and Estimating Cash Flows
Table 12.2
PROPERTY CLASS
RECOVERY
YEAR
MACRS depreciation
percentages
3-YEAR
5-YEAR
7-YEAR
10-YEAR
20.00%
32.00
14.29%
24.49
10.00%
18.00
33.33%
44.45
3.
14.81
19.20
17.49
14.40
4.
7.41
11.52
12.49
11.52
5.
11.52
8.93
9.22
5.76
8.92
7.37
8.93
6.55
8
4.46
6.55
6.56
6.55
3.28
9.
10
11
Totals
100.00%
100.00%
100.00%
100.00%
Transcribed Image Text:You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions Project A Project B Project C Project D Project E Project F Investment -1000 -1000 -1000 -1000 -1000 -1000 1 150 200 250 800 900 1000 2 350 300 250 350 300 200 3 400 500 600 200 150 100 4 700 650 600 200 150 50 12 Capital Budgeting and Estimating Cash Flows Table 12.2 PROPERTY CLASS RECOVERY YEAR MACRS depreciation percentages 3-YEAR 5-YEAR 7-YEAR 10-YEAR 20.00% 32.00 14.29% 24.49 10.00% 18.00 33.33% 44.45 3. 14.81 19.20 17.49 14.40 4. 7.41 11.52 12.49 11.52 5. 11.52 8.93 9.22 5.76 8.92 7.37 8.93 6.55 8 4.46 6.55 6.56 6.55 3.28 9. 10 11 Totals 100.00% 100.00% 100.00% 100.00%
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