The owners of Farco Incorporated have a dilemma. They plan to expand their subsidiaries; however, they currently have the resource to expand only one. Given the discount rates and the future cash flow of each project listed in the following table, answer the questions below and help the owners to make the most viable decision.

Required:

1. Compute the payback period for each project (12 marks)
2. Assess the decision rule for the payback method. (3 marks)
3. Compute the discounted payback period for each project using a discount rate of 10%.

(12 marks)

4. Justify the rationale behind the discounted payback method. (3 marks)
5. Compute the net present value for each project. (12 marks)
6. Explain the rationale behind the NPV method. (3 marks)
7. Discuss how the company would use the NPV method to rank mutually exclusive projects.

(3 marks)

8. Calculate the profitability index and state the decision for each project. (8 marks)
9. Based on each capital budgeting decision model, advice the company about the best project to undertake. (4 marks)

Cash Flow Year o Project A -$1,500,000 $ 350,000 Project D -$2,000,000 $ 200,000 Year 1 Year 2 Project B $1,500,000 $ 400,000 $ 400,000 $ 400,000 $ 400,000 $ 400,000 $ 350,000 $ 350,000 $ 350,000 $ 350,000 Project C -$2,000,000 $ 700,000 $ 600,000 $ 500,000 $ 400,000 $ 300,000 13% Year 3 $ 400,000 $ 600,000 $ 800,000 $1,000,000 Year 4 Year 5 Discount rate 4% 8% 18%