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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. 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.