Island Corporation is considering two mutually exclusive projects. Project 1 requires an investment of $80,000, while Project 2 requires an investment of $90,000. Cash revenues and cash costs for each project are shown below:

PROJECT 1

YEAR 1 2 3 4

Revenues $30,000 $50,000 $70,000 $90,000

Variable costs 8,000 12,000 20,000 25,000

Fixed costs 12,000 10,000 10,000 10,000

PROJECT 2

YEAR 1 2 3 4

Revenues $65,000 $80,000 $60,000 $40,000

Variable costs 15,000 30,000 14,000 12,000

Fixed costs 5,000 20,000 10,000 8,000

The company estimates that at the end of the fourth year Project 1 would have a salvage value of $10,000 and Project 2 would have a salvage value of $5,000.

Required:

a. Calculate the payback period of each project.

b. Determine the net present value of each project using a 5% percent discount rate.

c. Compute profitability index.

d. Critically discuss the three different methods, payback period, present value, profitability index as an investment appraisal method.

e. Prepare a memorandum for management stating your recommendation.

f. Compute the breakeven point for each Project, if the expected output for project 1 is 25,000 units and Project 2 has an expected output of 49,000 units.

g. Compute the output of each project if a profit was $50,000.