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Alpha Corp is considering two projects, Project A and Project B. Project A Year 0: -$150,000 Year 1: $20,000 Year 2: $30,000 Year 3: $50,000

Alpha Corp is considering two projects, Project A and Project B.

Project A

  • Year 0: -$150,000
  • Year 1: $20,000
  • Year 2: $30,000
  • Year 3: $50,000
  • Year 4: $100,000

Project B

  • Year 0: -$200,000
  • Year 1: $60,000
  • Year 2: $70,000
  • Year 3: $80,000
  • Year 4: $90,000

The discount rate for Project A is 8%, and for Project B is 12%.

Requirements:

  1. Calculate the payback period for each project.
  2. Determine which project should be accepted if Alpha Corp requires a payback period of 3 years.
  3. Compute the profitability index for each project.
  4. Recommend which project to accept based on the profitability index.
  5. Calculate the net present value (NPV) for each project and determine which project to accept based on NPV.

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