Which of the projects will qualify for acceptance

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Reference no: EM131871511

Doorpane produces door panels for the Indonesian housing market. Its management is considering three investment projects for the next years. The company’s policy is not to invest in projects that requires more than three years to recover the company’s initial investment. The cash flows for the three projects (Project Belian, Project Kapur and Project Merbau) are as follows:

Year | Project Belian $ | Project Kapur $ | Project Merbau $

0 | (1,000) | (10,000) | (5,000)

1 | 600 | 5,000 | 1,000

2 | 300 | 3,000 | 1,000

3 | 200 | 3,000 | 2,000

4 | 100 | 3,000 | 2,000

5 | 500 | 3,000 | 2,000

(a) Given Doorpane’s three-year payback period, which of the projects will qualify for acceptance?

(b) Rank the projects using their payback periods. Which project looks the best using this criterion? Do you agree with this ranking? Why or why or not?

(c) If Doorpane uses a 10 percent discount rate to analyse projects, what is the discounted payback period for each of the three projects? If the firm still maintains its three-year payback policy for the discounted payback, which projects should the firm undertake?

Reference no: EM131871511

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