The Hershey Company is planning their capital expenditure budget and has to decide which of the following two projects to invest in. Each project will require an initial investment of $70,000 and will last for three years and produce the following annual cash flows.

Year Astaire Rogers

1 $ 18,000 $ 30,000

2 27,000 30,000

3 30,000 30,000

$75,000 $90,000

Instructions

1. Calculate the cash payback for each project.
2. Using the net present value method (hint: use discount factors), compute the net present value for each project if 8% is an acceptable earnings rate. (Use tables from Appendix G.)
3. Which project should be selected? Explain your answer.