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CAPITAL BUDGETING

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

1. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable.
2. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order?
3. 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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