Question 1: What are the criticisms of the use of payback period as a capital-budgeting technique? What are its advantages? Why is it so frequently used?
Question 2: You are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,000 at the end of the year for 6 years. The required rate of return for this project is 10 percent.
A. What is the project's payback period?
b. What is the project's NPV?
C. What is the project's PI?
D. What is the project's IRR?
Question 3: (Capital rationing)The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals, for which the funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability indexes associated with them.
Project Cost Profitability Index
A $4,000,000 1.18
b 3,000,000 1.08
C 5,000,000 1.33
D 6,000,000 1.31
E 4,000,000 1.19
F 6,000,000 1.20
G 4,000,000 1.18
A. Under strict capital rationing, which projects should be selected?
B. What problems are there with capital rationing?
My textbook for this class is Foundations of Finance by Keown, Martin, Petty, Scott Jr. The fifth edition.