Calculate payback methods, discounted payback methods, net present values, internal rate of return, and profitability index. Determine what Durango should do based on calculations.

Durango Cereal Company is considering adding two new kinds of cereal to its product line-one geared to children and the other toward adults. The company is currently at full capacity and will have to invest a large sum in machinery and production space. However, given the nature of cereal production, the investment in machinery will be more costly for the childrens cereal (Poofy Puff) than for the adult cereal (filling Fiber). The expected cash flow for the two cereals are:

Year Poofy Puff Filling Fiber

0 -$24,890,000 -$13,500,000

1 12,950,000 7,230,000

2 10,923,000 8,100,000

3 8,231,000 8,629,000

4 7,242,000 5238,900

Management requires a minimum return of 15% in order for the project to be acceptable.

The discount rate for projects of this level of risk is 10%. Management requires projects with this type of risk to have a minimum payback of 1.75 years.

Assuming the projects are independent and ignoring the issue of scale, what should Durango Cereal Company do? Include calculations for the payback method, the discounted payback method net present value, internal rate of return and profitability index in your analysis. Revisit the problem considering the scaling issue. Which project should the company consider, if any?