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Question 1: Hex Ltd is considering several plant improvements and has allocated $880,000 for this...

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Accounting

Question 1:

Hex Ltd is considering several plant improvements and has allocated $880,000 for this investment. The following options / projects are under consideration. Assume that the net annual cash inflows are all perpetuities.

Cost $

Net annual inflows ($)

Project A

800,000

180,000

Project B

110,000

12,000

Project C

700,000

150,000

Project D

70,000

12,000

Project E

80,000

15,000

Project A and Project C are mutually exclusive projects. However, the management of Hex Ltd has indicated that either Project A or Project C must be undertaken.

If Project A is undertaken, then Project D would cost $10,000 less as certain features of Project D are not necessary with the implementation of Project A.

If Project C is undertaken, the total cost of Project E would be $85,000 as additional capabilities are possible with the simultaneous implementation of Project C. The additional capabilities will result in net annual inflows of $18,000 for Project E.

Hex Ltds required rate of return is 12%.

From the above information:

Determine which combination of projects should Hex Ltd consider for implementation. Support your answer with reasons for your selection.

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