All techniques, conflicting rankings Baloma Engineering Ltd. in Hong Kong is considering two mutually exclusive projects that both cost HKD 450,000. The company’s board of directors has set a maximum four-year payback requirement, the cost of capital is 12%. The project cash flows appear below.

a. Calculate the payback period for each project.

b. Calculate the NPV of each project at 12%.

c. Calculate the NPV of each project at 0%.

d. Derive the IRR of each project.

e. Rank the projects by each of the techniques used. Make and justify a recommendation.

f. Go back one more time and calculate the NPV of each project using a cost of capital of 15%. Does the ranking of the two projects change compared to your answer in part e? Why?

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Year 0 1 2 3 4 5 6 Cash inflows (CF) Project 1 Project 2 -HKD 450,000 -HKD 450,000 135,000 225,000 135,000 180,000 135,000 135,000 135,000 135,000 90,000 90,000 90,000 90,000