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Hamilton Manufacturing Ltd is considering the purchase of one of four mutually exclusive projects for improving its assembly line. The required...
The manufacturing department has requested the board to evaluate these opportunities using a discounted cash flow technique. The finance department personnel have been unwilling to use a discounted cash flow technique because of the difficulty in establishing an appropriate discount rate. They, therefore, propose to calculate each project's internal rate of return and let the board determine appropriate hurdle rates.
Required:
(a) Calculate each project's payback period and state which alternative should be accepted based on this criterion.
(6 marks)
(b) Calculate each project's internal rate of return (IRR), and using a hurdle rate of 25% state which of the opportunities is acceptable by this criterion.
(8 marks)
(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?
(8 marks)
(d) Discuss some of the elements which should be considered when determining the appropriate hurdle rate for an individual project. (Word limit: 500)
(8 marks)
