Integrative Case 10

Your firm is considering two potential projects, Project I and Project J, with the following expected cash flows.

Expected Cash Flows:

Year	Project I	Project J
0	($280)	($360)
1	$60	$70
2	$80	$90
3	$100	$110
4	$130	$150

Requirements:

1. Determine the Payback Period for both projects.
2. Calculate the Discounted Payback Period using a 12% discount rate.
3. Compute the Net Present Value (NPV) for each project at a discount rate of 12%.
4. Find the Internal Rate of Return (IRR) for both projects.
5. Recommend which project should be accepted based on NPV and IRR.

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Question 1

A company is considering the acquisition of new equipment costing $250,000. The equipment is expected to have a useful life of 7 years with no salvage value. It will generate annual cash flows of $60,000 before taxes. The company's tax rate is 30%. The present value factors for 7 years are as follows:

Discount Rate	Cumulative Factor
10%	4.868
11%	4.712
12%	4.565
13%	4.424
14%	4.290

Calculate the following:

1. Annual after-tax cash flows.
2. Net Present Value (NPV) at a discount rate of 12%.
3. Internal Rate of Return (IRR).
4. Payback period.
5. Profitability Index (PI) at a discount rate of 12%.