Reference no: EM132619183
Wyndham Ltd is considering investing in a new project and has identified two alternatives: Project Hunter Valley and Project Coonawarra. The details of each project are given below:
Project Hunter Valley Project Coonawarra
Initial cost (paid at time 0) $120,000 $200,000
Cash flow received Yr 1 $60,000 $60,000
Cash flow received Yr 2 $80,000 $80,000
Cash flow received Yr 3 $50,000 $160,000
Method 1: Net Present Value $43,834 $51,156
Method 2: Payback Period 1.75 years 2.375 years
Method 3: Accounting Rate of Return 38.9% 33.3% Both projects will have no residual value (will be worth zero) after the 3rd year.
Required :
Problem a. For each method, state the decision rule and identify the project that yields the most favourable result for Wyndham Ltd.
Problem b. Draw an overall conclusion as to whether, based on the 3 methods, you would recommend Project Hunter Valley or Project Coonawarra and why.
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