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This assignment supports the following objectives:

Calculate IRR NPV and Payback Period

Analyze the cash flows generated by mutually exclusive projects

Formulate a recommendation using IRR NPV and Payback Period as the criteria

Background

Suppose that your firm is considering the following two mutually exclusive projects. Both projects have the same initial cost of $312500 and the resulting

annual cash flows for the first five years are as shown in the table below:

Year

Alpha

Beta

0

$ (312500)

$ (312500)

1

375000

28935

2

46875

80376

3

15625

99229

4

15625

160788

5

3125

191414

It is your job to analyze the feasibility of these two projects and to make recommendations as to which project should be undertaken. You must present a

written report of your findings and your recommendations to middle managers many of whom may be unfamiliar with some of your computations. You may choose to

present the results of your calculations in table form. In your report you must address each of the following:

Analyses:

a. Calculate the IRR of each project. Which project should be selected using IRR as the criterion?

b. In its analyses of projects of this type your firm uses a 14.0 percent discount rate. Compute the NPV for each project using the

14.0 percent discount rate. Which project should be chosen based on this result?

c. In some cases your firm uses the payback period to assess projects with a cut-off point of 3 years. Calculate the payback period

for each project and explain which project should be chosen using this criterion.