Problem
RARE Ltd considering investing between two mutually exclusive projects, project Alpha and Project Beta. Both projects have a useful life of 5 years. The company's target payback period is 3 years.
The cash flow associated with the project are as follows:
Cash Flow Project Alpha Project Beta
Initial investment (R500,000) (R500,000)
Year 1: 150,000 300,000
Year 2: 200,000 225,000
Year 3: 125,000 350,000
Year 4: 300,000 150,000
Year 5: 250,000 90,000
Required:
a) Calculate payback period for each project and recommend which project RARE should select.
b) Calculate the net present value for each project and recommend which RARE should select on this method.