Cording Manufacturing is a small company currently analyzing capital expenditure proposals for the purchase of equipment. The capital budget is limited to $500,000 which Cording believes is the maximum capital it can raise. Richard King, an outside financial adviser, is preparing an analysis of three projects that Walter Minden, Cording's President, is considering. King has projected the future cash flows for each potential purchase. The information concerning the three projects is as follows:

(a)Because Cording Manufacturing's cash is limited, Walter Minden thinks the payback method for calculating investments would be the best method for choosing capital budgeting projects.

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

(ii)Calculate the payback period for each of the three projects. Ignore income tax considerations.

(b)King would like to compare the projects using the net present value method. The required rate of return for Cording is 12%. All cash flows occur at the end of the year. Calculate the net present value for each project. Ignore income tax considerations.

Project A Project B Project C Projected Cash outflow Net initial investment $200,000 $190,000 $250,000 Projected cash inflows Year 1 $50,000 $40,000 $75,000 Year 2 50,000 50,000 75,000 Year 3 50,000 70,000 60,000 Year 4 50,000 75,000 80,000 Year 5 50,000 75,000 100,000