Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects.

a. Compute the net present value of each alternative. Round the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are incorrect and a more accurate estimate is as follows:

b. Repeat step (a) for the payback method.

c. Which method do you think provides the best source of information? Why?

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COST-BENEFIT ANALYsIs COST OF CAPITAL.14 Probability Amount Probability Amount 12 months 18 months 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $85,000 100,000 110,000 0.6 0.2 0.5 0.3 0.2 0.6 0.25 0.15 0.35 0.4 0.25 0.1 0.55 0.35 12 months 18 months 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $75,000 95,000 105,000 Project completion time 0.5 0.3 0.2 0.2 0.55 0.25 0.4 0.4 0.2 Expected useful life One-time costs Recurring costs Annual tangible benefits starting with weighted average completon date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000 10 $75,000 .55 .35 95,000 105,000 .4 .4 .2 $ 85,000 100,000 110,000