Homework answers / question archive / The Financial Director of Hong Kong HCM Hotel Group Limited plans to renovate the existing hotel building

The Financial Director of Hong Kong HCM Hotel Group Limited plans to renovate the existing hotel building

Accounting

Share With

The Financial Director of Hong Kong HCM Hotel Group Limited plans to renovate the existing hotel building. He has selected two projects for further studies. The following table shows the projected net cash inflows of the two projects over the coming four years.

                      Year 1                 Year 2                 Year 3                Year 4

Project A     $4,550,000         $3,450,000            $2,600,000           $2,600,000

Project B     $2,860,000         $4,490,000            $2,600,000            $1,300,000

Under each project, an initial investment of $8,000,000 is needed and the discount rate is set at 18% per annum

Discount factors for the discount rate at 18% per year are as follows:

Discount Factor

Year 1 0.8475

Year 2 0.7182

Year 3 0.6086

Year 4 0.5158

Required:

(a) Calculate the payback period (in years) for each project. Show your steps clearly. 

(b) Complete an evaluation for each project using net present value (NPV) at the discount rate at 18% for Year 1 to Year 4. 

(c) Based on the results in (b), comment on the two projects and recommend which one or both projects that the Financial Director should accept and implement.