Stephens Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each project are shown in the table that follows. Stephenss after-tax cost of capital is 12 percent. Excess funds cannot be reinvested at greater than 12 percent.

Project P Project Q Project R Project S

Initial cost $200,000 $235,000 $190,000 $210,000

Annual cash flows:

Year 1 93,000 90,000 45,000 40,000

Year 2 93,000 85,000 55,000 50,000

Year 3 93,000 75,000 65,000 60,000

Year 4 0 55,000 70,000 65,000

Year 5 0 50,000 75,000 75,000

NPV $23,370 $29,827 $27,233 $(7,854)

Internal rate 18.7% 17.6% 17.2% 10.6%

Of return

Profitability 1.12 1.13 1.14 0.95

index

Required

A. Which of the four projects are acceptable options? Why?

B. If only one project can be accepted, which one should the company choose?