Reference no: EM132499689

JT Limited is currently analyzing capital budgeting proposals for the three potential project investment.

The president has projected the future cash flows for three potential purchases of equipment. The information concerning the three projects is as follows:

                                               Project A                           Project B                       Project C

Projected Cash Outflow (000)

Initial Outlay                                1,600                           1,500                             800

Projected Cash Inflows (000)

Year 1                                        500                                  600                            400

Year 2                                        500                                     500                           300

Year 3                                         500                                     400                           300

Year 4                                         500                                   100                             100

The required rate of return for JT Limited is 8 %.

Ignore taxation.

Required:

Question (a) The president would like to know the payback periods for the following projects.

(i) Calculate the payback period for each of the three projects and suggest which project(s) should be accepted under the payback method criteria if A, B and C are independent projects and the cut-off period is 3 years.

(ii) Calculate the discounted payback period for each of the three projects and suggest which project(s) should be accepted under the discounted payback method criteria if A, B and C are mutually exclusive projects and the cut-off period is 3 years.

Question (b) The president would like to compare the projects using the net present value (NPV) method. All cash flows incurred at the end of the year. Calculate the NPV for each of the three projects and suggest which project(s) should be accepted under the NPV method criteria if A, B and C are independent projects.