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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