Question

The CEO just announces that all capital budgeting projects must meet a payback threshold of four years. What is the project’s payback period? Will you accept the project? Comment

Answer #1

The payback period is the number of years that a project will take to recover it's initial investment. The higher the payback period, the lower is the chances of the project to be accepted on the basis of the payback period.

For example, if the payback period is 4.5 years and the threshold decided by the management us 4 years. Then , the project cannot be accepted.

Inital cash outflow : $2,00,000

cash inflow : $50,000

$80,000

$30,000

$20,000

$40,000

In this example, the payback period is :

=4 + $20,000/ $40,000

= 4.5 years

$180,000 is recovered in the first 4 years, so the remaining $20,000 is recovered from the cahs inflow of $40,000 in the 5th year.

So, as the proejct payback period is more than the threshold payback period, this proeject should be rejected.

7) A company uses the payback
method to evaluate capital budgeting projects. It is
currently considering projects A, B and C.
Project
A Project
B Project
C
Initial cost (cash
outflow) $10,000 $10,000 $10,000
Cash inflows:
1st
year $ 1,000 $9,000 $ 5,000
2nd year
$9,000 $1,000 $5,000
3rd year $15,000
- 0
- $35,000
a) Find the payback period for
each of the above capital budgeting projects. Label the
payback period for each project so I can see which payback period
goes with which project.
b) What two major weaknesses of
the payback method are illustrated by...

25) Refer to the capital budgeting narrative: Assume that the
firm has a threshold of 3.2 years, then based on the PB method.
Capital Budgeting Narrative:
(Use the folowing information for questions referring to the
narrative): Gevrek Communications is considering a new project. The
initial investment is $85,103.35. and the cost of capital is 10%.
Expected cash flows over the next four years are given below:
Year
Cash Flow ($)
1
14,000
2
35,000
3
42,000
4
40,000
EDIT: normal...

Consider the capital budgeting decision to be made with the
following data about 2 competing projects. Project A has an NPV of
$12 500, and IRR of 10% and a payback period of 3 years. Project B
has an NPV of $12 000, but an IRR of 13% and a payback period of 2
years 10 months. Which project(s) would be chosen on an independent
basis?
Select one:
a. Project A and Project B
b. Neither Project A nor Project...

Consider the capital budgeting decision to be made with the
following data about 2 competing projects. Project A has an NPV of
$12 500, and IRR of 10% and a payback period of 3 years. Project B
has an NPV of $12 000, but an IRR of 13% and a payback period of 2
years 10 months. Which project(s) would be chosen on an independent
basis?
Select one:
a. Project B
b. Neither Project A nor Project B
c. Project...

You are analyzing a capital project. It passes the Payback
threshold of your company. So, if the accounting rate of return
exceeds the companies’ required rate of return, you would
recommend:
A) invest in the capital asset.
B) do not invest in the capital asset.
C) only invest if the payback period is also greater than the
required rate of return.
D) only invest if the payback period is also less than the
required rate of return.

The decision process
Before making capital budgeting decisions, finance professionals
often generate, review, analyze, select, and implement long-term
investment proposals that meet firm-specific criteria and are
consistent with the firm’s strategic goals.
Companies often use several methods to evaluate the project’s
cash flows and each of them has its benefits and disadvantages.
Based on your understanding of the capital budgeting evaluation
methods, which of the following conclusions about capital budgeting
are valid? Check all that apply.
For most firms, the...

2Assume that you are a new analyst hired to
evaluate the capital budgeting projects of the company which is
considering investing in two CPEC projects, “Expansion Zone North”
and “Expansion Zone East”. The initial cost of each project is Rs.
10,000. Company discount all projects based on WACC. Further, all
the projects are equally risky projects and the company uses only
debt and common equity for financing these projects. It can borrow
unlimited amounts at an interest rate of rd...

11. The NPV and payback period
What information does the payback period provide?
A project’s payback period (PB) indicates the number of years
required for a project to recover its initial investment using its
operating cash flows. As the theoretical soundness of the
conventional (undiscounted) PB technique was criticized, the model
was modified to incorporate the time value of money-adjusted
operating cash flows to create the discounted payback method. While
both payback models continue to reflect faulty ranking criteria,
they...

You are a financial analyst for Hittle Company. The director of
capital budgeting has asked you to analyze two proposed capital
investments, Projects X and Y. Each project has a cost of $10,000,
and the cost of capital for each project is 10 percent. The payback
cutoff period is 3 years. The projects’ expected net cash flows are
as follows:
Expected Net Cash Flows
Year
Project X
0 ($10,000)
1 6,500
2 3,000
3 3,000
4 1,000
Project Y
($10,000)...

CAPITAL BUDGETING CRITERIA
A firm with a 14% WACC is evaluating two projects for this
year's capital budget. After-tax cash flows, including
depreciation, are as follows:
0
1
2
3
4
5
Project M
-$18,000
$6,000
$6,000
$6,000
$6,000
$6,000
Project N
-$54,000
$16,800
$16,800
$16,800
$16,800
$16,800
Calculate NPV for each project. Round your answers to the
nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two...

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