There are two projects under consideration by the Rainbow Factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Year 1Year 2Year 3TotalAlpha$32,000$22,500$5,000$59,500Beta$7,500$23,500$28,000$59,000 Calculate the payback, NPV, IRR & PI for both projects. Assume 10% Cost of capital. Which would you recommend?

Formulas:Calculate the Payback period, NPV,IRR and PI as follows: Project Alpha is good for investment. As the NPV of project Alpha is greater than Beta.

Answered: There are two projects under…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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There are two projects under consideration by the Rainbow Factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows:

	Year 1	Year 2	Year 3	Total
Alpha	$32,000	$22,500	$5,000	$59,500
Beta	$7,500	$23,500	$28,000	$59,000

Calculate the payback, NPV, IRR & PI for both projects. Assume 10% Cost of capital. Which would you recommend?

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