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The capital budgeting tools give the following results -

Payback period comes to 3.43 years

Annual rate of return is 31.78%

Net present value is $25,095.39 and

Internal rate of return is 16.70%

The minimum required rate of return (Hurdle rate) of the company is 12%. We can compare this
value with calculated Internal rate of return (IRR) which is 16.70%. Here, we observe that the
IRR is higher than the Hurdle rate, therefore, company must accept the proposal of in-house
manufacturing of cans. This decision is also justified on comparing the Hurdle rate with Annual
rate of return (ARR) of 31.78%. Here, ARR is also greater than Hurdle rate.

If the Hurdle rate of 12% is used to analyze the project then the NPV comes to $25,095.39 which
is positive. Therefore, acceptance of project is again justified on the basis of NPV tool.

The acceptance or rejection of project on the basis payback period require two things - calculated
payback period and company’s own required time period during which the initial investment
must be return back. Here, the company’s own time frame of having back its investment is not
given; therefore, there is nothing to compare with calculated payback period. Hence decision of
acceptance or rejection of project can’t be made on the basis of payback period.

Second, the payback period doesn’t take into account of time value of money. Therefore, it is not
considered a standard tool for capital budgeting.

Hence, on the basis of ARR, NPV and IRR, project must be accepted.