21 st Century is a rapidly growing software company, and consistent with its growth, it has a relatively large capital budget While most of the companys projects are fairly easy to evaluate, a handful of projects involve more complex evaluations John Keller, a senior member of the companys fianc staff, coordinates the evaluation of these more complex projects His group brings their recommendations directly to the companys CFO and CEO Right now, Kellers group is looking at a variety of interesting projects For example, the group has been asked to choose between the following two mutually exclusive projects Expected Cash Flows Year Project S Project L 0 ($100,000) ($100,000) 1 59,000 33,500 2 59,000 33,500 3 33,500 4 33,500 Both projects may be repeated and both are of average risk, so they should be evaluated at the firms cost of capital, 10 Which one should be chosen Requirement 1 Using shortest common period of time approach Requirement 2 Using equivalent annual annuity approach Lets assume that there is uncertainty about the future cash flows for project S More specifically, assume that the yearly cash flows are now $ 53,500 if the market is strong and $ 13,500 if the market is weak Assume that the up front cost is still $ 100,000 and that the cost of capital is still 10 Requirement 3 Will this increased uncertainty make the firm more or less willing to invest in the project S today Justify your answer based on calculations

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21 st Century is a rapidly growing software company, and consistent with its growth, it has a relatively large capital budget. While most of the

21^st Century is a rapidly growing software company, and consistent with its growth, it has a relatively large capital budget. While most of the companys projects are fairly easy to evaluate, a handful of projects involve more complex evaluations.

John Keller, a senior member of the companys fianc staff, coordinates the evaluation of these more complex projects. His group brings their recommendations directly to the companys CFO and CEO.

Right now, Kellers group is looking at a variety of interesting projects. For example, the group has been asked to choose between the following two mutually exclusive projects:

	Expected Cash Flows
Year	Project S	Project L
0	($100,000)	($100,000)
1	59,000	33,500
2	59,000	33,500
3		33,500
4		33,500

Both projects may be repeated and both are of average risk, so they should be evaluated at the firms cost of capital, 10%. Which one should be chosen?

Requirement 1: Using shortest common period of time approach

Requirement 2: Using equivalent annual annuity approach

Lets assume that there is uncertainty about the future cash flows for project S. More specifically, assume that the yearly cash flows are now $ 53,500 if the market is strong and $ 13,500 if the market is weak. Assume that the up-front cost is still $ 100,000 and that the cost of capital is still 10%.

Requirement 3: Will this increased uncertainty make the firm more or less willing to invest in the project S today? Justify your answer based on calculations.