10-2: Your company is evaluating two mutually exclusive projects that each have an initial outlay of $180,000. Free cash flows are scheduled in the table below. Maximum payback is set at 3 years, and the cost of capital is projected to be 9%.

Year Project Y FCF Project Z FCF

1 $70,000 $60,000

2 60,000 60,000

3 50,000 60,000

4 40,000 60,000

(A) Calculate the payback for Projects Y and Z.

(B) Calculate the NPV of each project at the discount rate of 9%. Assume year-end annual cash flow.

(C) Calculate the IRR of each project.

(D) Rank the projects by each method. Which do you favor for your decision? Explain.