a) Prospect Hill Inc. is considering two mutually exclusive projects that differ greatly on the required

investment and projected cash flows. The initial investment required for Project 1 is $200,000.

While for Project 2 it is $40,000. Proposed after-tax cash flows are shown below:

$ Cash Flows

Year Project 1 Project 2

1 15,000 25,000

2 25,000 10,000

3 30,000 8,000

4 40,000 8,000

5 200,000 1,000

The opportunity cost of capital for Prospect Hill Inc. is 5%

REQUIRED: (10 marks)

For each project calculate the following:

i) Pay back period (2 marks)

ii) Discounted pay back period (3 marks)

iii) NPV (3 marks)

iv) Profitability Index (2 marks)

v) Which project should Prospect Hill invest in? (1 mark)

b) The cash flows for two mutually exclusive projects are as follows:

C0 C1 C2 C3

Project A -30,000 14,000 14,000 14,000

Project B -50,000 24,000 24,000 24,000

REQUIRED: (7 marks)

i) Calculate NPV for each project if the required rate of return is 12%. (3 marks)

ii) Calculate the Internal Rate of Return (IRR) for each project. (3 marks)

iii) Which project should the company invest in? Why? (1 mark)