CAPITAL BUDGETING - MINI CASE STUDYFenton, 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 shown. Each investment has a 6-year expected useful life and no salvage value. Payback PeriodIRRInvestment CostProject A14.210.5%$130,000Project B25.95.1% 67,000Project C35.013.4% 83,000Project D44.87.4% 61,000Project E53.212.1% 115,000Project F64.09.9% 65,000Project G76.39.8% 76,000 Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable.Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order?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?

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Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...

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CAPITAL BUDGETING - MINI CASE STUDY

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 shown. Each investment has a 6-year expected useful life and no salvage value.

	Payback Period	IRR	Investment Cost
Project A1	4.2	10.5%	$130,000
Project B2	5.9	5.1%	67,000
Project C3	5.0	13.4%	83,000
Project D4	4.8	7.4%	61,000
Project E5	3.2	12.1%	115,000
Project F6	4.0	9.9%	65,000
Project G7	6.3	9.8%	76,000

Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable.
Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order?
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?

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