Question

Heart Construction is analyzing its capital expenditure proposals for equipment in the coming year. The capital...

Heart Construction is analyzing its capital expenditure proposals for equipment in the coming year. The capital budget is limited to $15,000,000 for the year. Laura, staff analyst at Heart Construction, is preparing an analysis of the three projects under consideration by Mr. Heart, the company’s owner.

Project A

Project B

Project C

Net initial investment

$6,600,000

$8,500,000

$9,000,000

Year 1 cash inflows

3,600,000

5,500,000

4,900,000

Year 2 cash inflows

3,600,000

2,000,000

4,900,000

Year 3 cash inflows

3,600,000

1,100,000

200,000

Year 4 cash inflows

3,600,000

0

100,000

Required rate of return

6%

6%

6%

Requirement

  1. Calculate the NPV for each project. Ignore income taxes. Round your answer to the nearest whole dollar.
  2. Using only the NPV calculations, which project(s) should Mr. Heart choose?
  3. Calculate the IRR for each project. Ignore income taxes.
  4. Calculate the project profitability index for each project. Ignore income taxes.
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