Problem: As director, you are reviewing three potential investment projects with the following cost and cash flow projections.
Cash Flow Project 1 Project 2 Project 3
Investment Cost ($400,000) ($375,000) ($400,000)
Year One Cash Flow $200,000 $75,000 $50,000
Year Two Cash Flow $50,000 $75,000 $120,000
Year Three Cash Flow $75,000 $85,000 $140,000
Year Four Cash Flow $50,000 $225,000 $125,000
Year Five Cash Flow $125,000 $60,000 $125,000
Q1. What is the Payback Period for each project?
Q2. If the discount rate for all three projects is 10.5%, What is the Net Present Value for each project?
Q3. What is the Internal Rate of Return (IRR) for each project?
Q4. If your capital investment budget of $500,000 will only allow selection of one project (making the projects now mutually exclusive), which project is best to fund?