Payback and NPV methods, no income taxes. (CMA, adapted) Portage Transportation Services is analyzing capital expenditure proposals for the improvement of its cross-docking facilities. The capital budget is limited to $300,000, which Portage believes is the maximum capital it can borrow from financial institutions. Leslie O'Connor, an external consultant, is preparing an analysis of four projects that Karl Luften, Portage's president, is considering. O'Connor has projected the future cash flows for each potential purchase. The information concerning the four projects is given below.

REQUIRED 1. Since Portage’s cash is limited, Karl Luften thinks that the payback method of calculating investments would be the best method for choosing capital-budgeting projects.

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

b. Calculate the payback period for each of the four projects. Ignore income tax considerations.
2. O’Connor would like to compare the projects using the net present value method. The required rate of return for Portage is 10%. All cash flows occur at the end of the 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.LO1

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Project A Project B Project C Project D Projected cash outflow Net initial investment Projected cash inflows Year 1 $240,000 $228,000 $300,000 $252,000 $ 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