Capital Budgeting
Heartland Fabrication is considering a capital investment of $130 million to expand production by building a new manufacturing plant and distribution center. Several prospective locations and build concepts are being evaluated.
As the capital investment team evaluates the opportunity, several factors are being considered. All these factors are brought together to form an investment strategy and ultimately, to determine which option provides the greatest net benefit to the company.
Several investment profitability models are used to quantify the alternatives, including discounted cash flow and payback methods.
- Explain how Heartland could benefit from the net present value (NPV) method and the internal rate-of-return (IRR) method.
- What are the main shortcomings of the NPV and IRR methods?
- Explain the payback method and describe the difference between uniform and nonuniform cash flows.
- What method do you recommend for Heartland? Why?
List at least 1References