Alfred Stein is about to invest $1,000. Alfred is a very cautious man and would like to have some expert advice on which of the two projects is best for him. He has not told you his exact cost of capital because he likes to keep such information provide, but he has told you to consider 8%, 10% and 12% in your calculations. He has also told you that the salesperson from whom he expects to purchase his equipment has given him the following expected cost savings patterns:
|
Year
|
Project 1
|
Project 2
|
|
1
|
$600
|
$300
|
|
2
|
600
|
600
|
|
3
|
600
|
800
|
|
4
|
600
|
700
|
Required:
A. Calculate the present value of each project at each of Alfred's potential costs of capital and indicate which project is acceptable at each.
B. Calculate the payback period for each project. Does your recommendation to Alfred change?
C. Calculate the profitability index for each project, using a cost capital of 10%. Which project would you recommend Alfred to pursue?
D. Additional Requirement: Use Excel to calculate the IRR for each project and discuss your results.