A company has $260,000 to invest in either Project Q or Project R. The cash flows are as follows:
•Year 1:
oProject Q: $65,000
oProject R: $25,000
•Year 2:
oProject Q: $65,000
oProject R: $50,000
•Year 3:
oProject Q: $65,000
oProject R: $95,000
•Year 4:
oProject Q: $65,000
oProject R: $140,000
•Year 5:
oProject Q: $65,000
oProject R: $75,000
The discount rate is 6%.
Required:
1.For each project, calculate the:
oSimple payback period
oDiscounted payback period
oNet present value
2.Prepare a pro forma income statement for the selected project for the next five years.
3.Advise the company on which project to select based on the results of your calculations.