Q5

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $500,000 and is expected to generate cash flows of $150,000 per year for 5 years. Project B requires an initial investment of $700,000 and is expected to generate cash flows of $200,000 per year for 5 years. The cost of capital is 8%. The present value factors for 8% are:

Year	PV Factor
1	0.926
2	0.857
3	0.794
4	0.735
5	0.681

Requirements:

1. Calculate the NPV for both projects.
2. Determine the payback period for each project.
3. Compute the profitability index for both projects.
4. Which project should be selected based on NPV and PI?
5. Explain the importance of considering the cost of capital in project evaluation.