JBS Inc. is considering allocating a limited amount of capital investment funds among four proposals. Find below
Question:
JBS Inc. is considering allocating a limited amount of capital investment funds among four proposals. Find below the four proposals.
Year | Proposal A ($) | Proposal B ($) | Proposal C ($) | Proposal D ($) |
0 | -540,000 | -250,000 | -640,000 | -310,000 |
1 | 150,000 | 100,000 | 220,000 | 130,000 |
2 | 150,000 | 90,000 | 210,000 | 100,000 |
3 | 150,000 | 80,000 | 210,000 | 60,000 |
4 | 90,000 | 65,000 | 190,000 | 60,000 |
5 | 250,000 | 65,000 | 160,000 | 60,000 |
Cost of financing=12%.
The company'scapital rationing policy requires a maximum payback period of three (3) years. The company will invest only in the proposals that meet this standard. The companywill invest only $800,000 in new proposals.
1. Fill in the table below with the computations for the indicated capital budgeting criteria. Include only the final number (Round to four decimal places).
Proposal | Payback period | Net Present Value | Profitability Index |
A | 4.0000 | $19,328.0312 | 0.0358 |
B | 2.7500 | $46,167.0038 | 0.1847 |
C | 3.0000 | $84,849.8696 | 0.1326 |
D | 3.3333 | $674.3272 | 0.0022 |
2. State which proposals pass the payback criterion and are accepted for further analysis.
____B and C_____
Briefly explain why: Proposal B and Proposal C are the two projects that follow the company's policy of having a payback period of no more than three years.
3. Assume that the proposals are indivisible projects. For the proposals that are accepted for further analysis in (2), indicate the best set of proposals to maximize owners' wealth. Keep in mind that there is a budget constraint of $800,000.
Proposals selected: Proposal B and Proposal C
Calculate the combined NPV for the selected proposals (show your calculations):
Briefly explain the rationale for your decision:
4. Assume that the proposals are divisible projects. For the proposals that are accepted for further analysis in (2), indicate the best set of proposals to maximize owners' wealth. Keep in mind that there is a budget constraint of $800,000.
Proposals selected: Proposal B and Proposal C
Calculate the combined NPV for the selected proposals (show your calculations):
Briefly explain the rationale for your decision:
Accounting
ISBN: 978-0324401844
22nd Edition
Authors: Carl S. Warren, James M. Reeve, Jonathan E. Duchac