Langley Co is considering two projects that will each cost $1,500,000 initially

and both projects will last 5 years:

Project A

This project will require $125,000 of initial working capital, and will generate

$420,000 cash inflows per year for the 5 years, at the end of which time it will be

scrapped with no residual value. The working capital will also be released at the

end of the 5-year period to be used for other new projects.

Project B

In addition to the original investment, Project B will need $125,000 in Year 3 in

order to maintain the equipment at peak capacity, and will generate $450,000 in

annual cash inflows. It will be scrapped and sold as salvage for $75,000 in its

final year.

The after-tax interest rate is 8%.

CCA rate -30%

Tax rate 40%

Required: 1) Use net present values to determine the more acceptable of the two projects on an after-tax rate.

2) Determine the internal rate of return of each project: Is it above [ ], or below[ ]

8%]. Does the IRR support your recommendation in 1)?