4. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000 for 5 years. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000 for 5 years. The company is very concerned about their cash flow. Using the simple payback period, which project is better from a cash flow standpoint? Why?

Required: Show calculations for payback periods for both projects.

Calculations for Payback (Alpha):

Calculations for Payback (Beta):

ANSWER (for 4):

5. Assume that the rate of inflation is 6%, use the Net Present Value (NPV), approach to calculate the NPV for both projects. Which project would you now recommend? Why?

Required: Show calculations for Net Present Values for both projects.

Calculations for NPV (Alpha):

Calculations for NPV (Beta):

ANSWER (5)

6. In your estimation, which approach to select projects is better? Explain your response, giving the pros and cons of each approach.

Required: You need to support your answer with arguments (explain your response).

The better option is:

The reason for selecting your better option (why):

Pros and cons for Payback approach:

Pros for Payback approach:

Cons for Payback approach:

Pros and cons for NPV approach:

Pros for NPV approach:

Cons for NPV approach: