Consider the two alternate investment proposals presented in the

Consider the two alternate investment proposals presented in the following table:

Consider the two alternate investment proposals presented in the

Proposal 1 requires higher up-front investment than Proposal 2 but helps in keeping the annual variable costs at a lower level than Proposal 2. If Proposal 2 is chosen, assume that the capital of $500,000 (i.e., the difference between the initial outlays of the two proposals) can be invested elsewhere at the cost of capital.

Required:
a. Rank the alternatives using the NPV method.
b. Rank the alternatives using the IRR method.
c. Some argue that the NPV does not control for project size. In other words, larger projects tend to have higher NPV, everything else remaining the same. Is this argument applicable in this problem? Explain.
d. What is the annual operating leverage under each proposal? Discuss the relative operating leverages of the two proposals in light of their rankings using the NPV and IRR methods in (a) and (b)above.

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