CASE 2 (25 points)

Consider the following two projects:

Year

0 1 2 3 4

Cash Flow (Alpha)

64,000 46,000 68,000 68,000 458,000

Cash Flow (Omega)

52,000 25,000 22,000 21,500 17,500

Whichever project you choose, if any, you require a return of 11 percent on your investment.

Instructions:

1. If you apply the payback criterion, which project will you choose? Why?

2. If you apply the NPV criterion, which project will you choose? Why?

3. If you apply the IRR criterion, which project will you choose? Why?

4. If you apply the profitability index criterion, which project will you choose? Why?

5. Based on your answers in (1) through (4), which project will you finally choose? Why?