Capital Budgeting Two Investment Proposals

As you know, we have experienced rapid growth in the last few years. As a result, we have been able to consistently pay dividends to our shareholders. The average annual rate of return on the stock in the last few years has been 20% which is equivalent to our cost of capital.

To focus on sustaining our growth for the future, Nancy Johnson recommends that the firm continue to invest in projects that offer the highest return possible.

With that, two projects are being proposed for review. Sue Sullivan has brought forth a project to expand the firms production capacity. Mary Mason brought forth a project to introduce one of our top-line snack goods to a new market. The initial investments and projected cash flows are shown below.

Can you please calculate the payback period, NPV, IRR, and PI to measure the value of these projects? In addition, can you please rank the projects according to each criterion? If there are conflicts in ranking, please provide an explanation as to why.

I know that you will be receiving a memo from Nancy Johnson shortly concerning these two proposed projects. Therefore, I want to be able to have your financial analysis ahead of time to review.

Plant Product

Expansion Introduction

Initial Investment	$(3,500,000)	$(500,000)
Cash inflows:
Year 1	1,500,000	250,000
Year 2	2,000,000	350,000
Year 3	2,500,000	375,000
Year 4	2,750,000	425,000