Consider the two alternate investment proposals presented in the following table:

Proposal 1 requires higher up-front investment than Proposal 2 but helps in keeping the annual variable costs at a lower level than Proposal 2. If Proposal 2 is chosen, assume that the capital of $500,000 (i.e., the difference between the initial outlays of the two proposals) can be invested elsewhere at the cost of capital.

Required:
a. Rank the alternatives using the NPV method.
b. Rank the alternatives using the IRR method.
c. Some argue that the NPV does not control for project size. In other words, larger projects tend to have higher NPV, everything else remaining the same. Is this argument applicable in this problem? Explain.
d. What is the annual operating leverage under each proposal? Discuss the relative operating leverages of the two proposals in light of their rankings using the NPV and IRR methods in (a) and (b)above.

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Proposal 1 Proposal 2 1,500,000 S1.000,000 10 years10 years Initial outlay Useful life Salvage value at the end of useful lifc Annual revenes Total variable costs Annual fixed costs 800,000 350,000 800,000 475,000 (exchuding depreciation)100,000 Required rate of retun Corporate tax rate 100,000 12% 30% 12% 30%