Question: Alberta Limited is considering two mutually exclusive projects. Relevant cash flows for each project are shown in the table below. Year Project Ajax Net Cash

Alberta Limited is considering two mutually exclusive projects. Relevant cash flows for each project are shown in the table below.

Year Project Ajax Net Cash Flow Project Eden Net Cash Flow

0 $55 000 $60 000

1 $22 000 $35 000

2 $22 000 $25 000

3 $22 000 $20 000

4 $22 000 $15 000

A. Define mutually exclusive projects and independent projects. (4 marks)

B. Determine the payback period of each project. If the company has a maximum acceptable payback period of three years, in which project should the company invest? Explain. (4 marks)

C. Suppose the company has a cost of capital of 12%. Determine the net present value of each project. Which project would be preferred in this situation and why? (6 marks)

D. Determine the profitability index of both projects. Which project would be preferred in this situation? Why? (6 marks)

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