Hurdlevack Ltd relies on the payback method of project evaluation, requiring that investments repay capital within three years. The board are currently considering the four projects listed below: (ignore tax) (a) Calculate each project's payback period and state which alternative should be accepted based on this criterion. (b) Calculate each project's internal rate of return (IRR) and using a hurdle rate of 15%, state which of the opportunities is acceptable by this criterion. (c) Discuss the possible reasons why the above two project appraisal methods do not give answers which are consistent with each other, for the accept/reject decision. Which should the board employ? Why? (d) Discuss some of the elements which should be considered when determining the appropriate hurdle rate for an individual project?
Project A B C D
Sales. 40,000. 75,000. 60,000. 60,000
Direct costs 16,000. 27,000. 15,000. 18,000
Depreciation 8,000. 40,000. 30,000. 35,000
Interest. 12,000. 16,000 9,000. 7,000
Initial Investment120,000. 160,000. 90,000. 70,000
Project life. 10. 10. 18. 15