Project Description:

task: capital budgeting decisions
this task 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

suppose that your firm is considering the following two mutually exclusive projects. both projects have the same initial cost of $312,500 and the resulting annual cash flows for the first five years are as shown in the table below:
year alpha beta
0 $ (312,500) $ (312,500)
1 375,000 28,935
2 46,875 80,376
3 15,625 99,229
4 15,625 160,788
5 3,125 191,414

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:
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.
d. based on all of your analyses, which project do you recommend? explain why you recommend this project.
e. suppose that the firm previously spent 15,000 dollars to conduct an environmental study for project alpha. explain how this affects your analyses and your recommendations.
f. suppose there is a potential change in environmental legislation which could force an expenditure in year 6 for project beta of 50,000 dollars. how might this affect your analysis? discuss.
your report must be approximately 250 – 500 words (one or two pages) and written in complete sentences appropriate for college level classes. construct a table showing the irrs, npvs and payback periods (and the associated recommendations) calculated in steps a through c. in the body of your report, explain each of your computations so that middle managers will understand what you did and how you reached your recommendations.
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