Problem
A. Two new software projects are proposed to a start-up company. Project Y will cost $150,000 to develop and is expected to have an annual net cash flow of $40,000. On the other hand, Project X will cost $200,000 to develop and is expected to have an annual net cash flow of $50,000. The company is very concerned about its cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?
B. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return (ROR) is 20 percent, conduct a discounted cash flow calculation to determine the NPV using both manual calculation and MS Excel.
C. You work for a company which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Below is the cash flow information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why?