Two new software projects are proposed to a young, start-up company. Project #1 will cost $250,000 to develop and is expected to have an annual net cash flow of $60,000 over the first 5 years of the project. Project #2 will cost $200,000 to develop and is expected to have an annual cash flow of $50,000 over the first 5 years of the project. The company is very concerned about their cash flow.

1. Using the payback period method, which project would you select for funding and why?

2. The project life for each project is estimated to be 8 years, with the cash flow dropping by $10,000 per year over the last 3 years for each project. Over that period the company has a minimum 15% required rate of return. The NPV for Project #1 is negative $2409 and for Project #2, it is $2717.

Which of the two projects would you fund and why?