Chapter 11, Problem 8TP

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 displayed in image. Each investment has a 6-year expected useful life and no salvage value.

A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable.

B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order?

C. 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?