Payback and NPV methods, no income taxes. (CMA, adapted) Cording Manufacturing is a small company that is currendy analyzing capital expenditure proposals for die purchase of equipment. The capital budget is limited to $600,000, which Cording believes is the maxi¬

mum capital it can raise.

Richard King, an outside financial advisor, is preparing an analysis of four projects that Walter Minden, Cording’s president, is considering. King has projected the future cash flows for each potential purchase. The information concerning the four projects is given below.

Project A Project B Project C Project D Projected cash outflow Net initial investment $240,000 $228,000 $300,000 $252,000 Projected cash inflows Year 1 $ 60,000 $ 48,000 $ 90,000 $ 90,000 2 60,000 60,000 90,000 90,000 3 60,000 84,000 72,000 72,000 4 60,000 90,000 96,000 48,000 5 60,000 90,000 120,000 24,000 Required 1. Since Cording Manufacturing’s cash is limited, Walter Minden thinks that the payback method of calculating investments would be the best method for choosing capitalbudgedng projects.

a. Explain what the payback method measures and how it is used. Include in your explanation several benefits and limitations ofthe payback method.

b. Calculate the payback period for each of the four projects. Ignore income tax considerations.

2. King would like to compare the projects using the net present value method. The required rate ofreturn for Cording is 10%. All cash flows occur at the end ofthe year. Calculate the net present value for each project. Ignore income tax considerations.

3. Which projects, if any, would you recommend funding? Briefly state your reasons why.