Suppose that a company is considering two different and mutually exclusive projects (X and Y), where both have a five-year life and require an investment of $126,000. The cash flow patterns for each project are given below.

Project X: Even cash flows of $42,000 per year

Project Y: $72,000, $60,000, $54,000, $30,000, and $18,000

Required:

1. Calculate the payback period for Project X (round to one decimal place):

Payback period =  _______years

2. Calculate the payback period for Project Y by completing the following table (round unrecovered investment and annual cash flow to nearest dollar and payback period to one decimal place):

Year	Unrecovered Investment (beginning of year)	Annual Cash Flow	Time Needed for Payback
1	$	$	year
2			year

Thus, the payback for Project Y is____ years and is ______  than payback for Project X; thus Project Y is______   and has_____   impact on liquidity.

3. Now assume that a third project, Project Z becomes available with the same investment outlay and the following annual cash flows (projects, X, Y, and Z are mutually exclusive):

Project C: $99,000, $30,000, $75,000, $75,000, $75,000

a. Calculate the payback for Project Z (round to one decimal place):  _________years

b. Project Z has the same payback as Project Y but should be preferred over Project Y for two reasons. First, Project Z provides $_______ more for the years beyond the payback period than Project Y. Second, Project Z returns $_________ in the first year, while Project Y returns only $________. The extra $ ______that Project Y returns in the first year could be put to productive use, such as investing in another project. The payback period thus ______  the time value of money.

Scenario 2

Assume that an investment requires an initial outlay of $720,000 with no salvage value. The life of the investment is five years with the following yearly cash flows (in chronological sequence): $216,000, $216,000, $288,000, $216,000, and $360,000

Required:

1. Calculate the annual net income for each of the five years:

Year 1:	$
Year 2:	$
Year 3:	$
Year 4:	$
Year 5:	$

2. Calculate the following:

a. Average net income (round to the nearest dollar) = $_____

b. Accounting rate of return (round to two decimal places): _______