New Horizon Heating Systems Limited (NHHSL) is a large publicly listed company and is the market leader in the heat pump manufacturing industry. The company is considering the purchase of one of four mutually exclusive projects for improving its assembly line. The required payback period is three and a 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 16 15

The manufacturing department has requested the board to evaluate these opportunities by means of 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.

(b) Calculate each project's internal rate of return (IRR), and using a hurdle rate of 22% state which of the opportunities is acceptable by this criterion.

(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?

(d) Discuss some of the elements which should be considered when determining the appropriate hurdle rate for an individual project.