I do believe that the proposal should be accepted. The reason being the Clark project has a positive NPV. The net present value method offsets the present value of an investment's cash inflows against the present value of the cash outflows. If the present value of cash inflows exceeds the present value of cash outflows, then it clears the minimum cost of capital and is deemed to be a suitable undertaking. On the other hand, if the present value of cash inflows is less than the present value of cash outflows, the investment opportunity should be rejected. Payback is calculated by dividing the initial investment by the annual cash inflow. The payback period is when the cumulative net cash inflows begin to exceed the cumulative net cash outflows. If an investment involves uneven cash flows, the computation requires scheduling cash inflows and outflows. Hence payback period is the duration in which initial investments are recovered. Here the payback period is very low and its 3.7 years which is good for the project. Internal rate of return is the interest rate that would cause the net present value to be zero. The IRR would be calculated for each investment opportunity. The decision rule is to accept the projects with the highest internal rates of return, so long as those rates are at least equal to the firm's cost of capital. If IRR is greater than cost of capital then one should accept the project. Clark has got IRR which is more than cost of capital. Hence one can accept the project. Overall Clark project acceptable as its NPV and IRR is positive.
Please join StudyMode to read the full document