The following table presents financial information regarding two alternative proposals.

The salvage value is expected to be zero for both proposals at the end of five years. The company uses a discount rate of 10% for such project evaluations. Ignore income taxes.

Required:
a. Rank the two projects using the net present value method. Which project is preferable?
b. Rank the two projects using payback periods. Which project is preferable?
c. What conclusions can you draw about using the payback period method for projectselection?

Proposal I Proposal 2 $8,750,000 $8,750,000 750,000 Net cash inflows-year 2 4,250,00,000,000 Net cash inflows year 3 $2,000,000 3,250,000 Net cash inflows -year 4 $700,0003,875.000 Net cash inflows-year5 $250,000 4,250,000 Initial cash outlay Net cash inflows-year 1 $3,750,000