Hamilton Manufacturing Ltd is considering the purchase of one of four mutually exclusive projects for improving its assembly line. The required payback period is three and half years. The financial data regarding the four projects is given below (ignore taxes).

Project	Project A	Project B	Project C	Project D
	$	$	$	$
Sales	80,000	150,000	110,000	90,000
Direct costs	32,000	54,000	30,000	36,000
Depreciation	16,000	80,000	60,000	70,000
Interest	24,000	32,000	18,000	14,000
Initial investment	200,000	350,000	180,000	140,000
Project life (years)	10	12	18	15

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)