Reference no: EM132562339

Question - Petram is a company that manufactures aircraft parts. The company is considering various investment projects that may improve operational efficiency, and has already spent $30,000 gathering relevant data. It has now shortlisted three projects and asked you to recommend the best option. You have been provided with the following information about the projects:

Project I will last for 4 years. The initial outlay is 1950,000 and the forecast operating cash inflow from the project is $350,000 for the first 2 years, 2425,000 in year 3 and $150,000 in the last year. Annual depreciation expense associated with this project is 1237,500.

Project II will last for 4 years. The initial outlay is $1,150,000 and the forecast operating cash inflow from the project is $550,000 in the first year and 2350,000 is $45,000 for the following three years. Annual interest expense associated with this project.

Project III will last for 4 years. The initial outlay is $850,000 and the forecast operating cash inflow from the project is $250,000 in the first year, then increasing by E40,000 each year in years 2, 3, and 4.

The firm's cost of capital is 10% per year.

Required -

(a) Evaluate each of the three projects using Payback Period.

(b) Evaluate each of the three projects using Net Present Value.

(c) Explain which projects should be accepted and why.