Problem::
You work for the 3T company, which expects to earn at least 18% on its investments. You have to choose between two similar projects. Below is the cash information for each project. Your analysts predict that the inflation rate will be a stable 3% over the next seven years. Which of the two projects would you fund if the decision is based solely on financial information? Why?
Omega Inflow Outflow Netflow
Year
Y0 $0 $225,000 -$225,000
Y1 $0 $190,000 -$190,000
Y2 $150,000 $0 $150,000
Y3 $220,000 $30,000 $190,000
Y4 $215,000 $0 $215,000
Y5 $205,000 $30,000 $175,000
Y6 $197,000 $0 $197,000
Y7 $100,000 $30,000 $70,000
Total $1,087,000 $505,000 $582,000
Alpha Inflow Outflow Netflow
Year
Y0 $0 $300,000 -$300,000
Y1 $50,000 $100,000 -$50,000
Y2 $150,000 $0 $150,000
Y3 $250,000 $50,000 $200,000
Y4 $250,000 $0 $250,000
Y5 $200,000 $50,000 $150,000
Y6 $180,000 $0 $180,000
Y7 $120,000 $30,000 $90,000
Total $1,200,000 $530,000 $670,000