Question

Andouille Spices, Incorporated, has the following μtually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 12 percent.

a) Analyze the provided projects and recommend the most suitable one
b) Calculate the net present value (NPV) for each project
c) Determine the payback period for each project
d) Assess the internal rate of return (IRR) for each project

Answer 1

To recommend the most suitable project, we need to analyze each project's NPV, payback period, and IRR. NPV is calculated by discounting cash flows. Payback period is the time to recover the initial investment. IRR is the discount rate that makes NPV zero.

Step-by-step explanation:

a) To recommend the most suitable project, we need to analyze each project's net present value (NPV), payback period, and internal rate of return (IRR). These metrics will help us determine which project will deliver the highest return on investment.

b) To calculate the NPV for each project, we need to discount the cash flows from each year using the required return rate of 12 percent. Summing up the present values will give us the NPV.

c) The payback period is the time it takes to recover the initial investment. To determine the payback period, we need to calculate the cash inflows for each year and analyze when it reaches or exceeds the initial investment.

d) IRR is the discount rate that makes the NPV of an investment equal to zero. We can find the IRR by trial and error or using financial functions in spreadsheet software.