Aluminum Building Products Company (ABPC) is considering investing in either of the two mutually exclusive projects described below:

Project 1:

Buying a new set of roll- forming tools for their existing roll- forming line to introduce a new cladding product. After its introduction the product will need to be promoted. This means that cash inflows from additional production will start sometime after and will gradually pick up in the subsequent periods.

Project 2:

Modifying their existing roll- forming line to increase productivity of their availability range of cladding products. Cash inflows from additional production will start immediately and will reduce overtime as the products move through their life cycle.

Sarah Brown, project manager of ABPC has requested that you do the necessary financial analysis and give your opinion as to which project ABPC should select. The projects have the following net cash flow estimates.

Ecpected Net Cash Flows

Years	Project 1	Project 2
0	(200000)	(200000)
1	20000	90000
2	30000	70000
3	40000	50000
4	60000	30000
5	90000	10000

Both the above projects have the same economic life of five years and ABPCs cost of capital or hurdle rate is 10%.

a. Calculate the NPV of each project. Which project would you recommend Ms. Sarah Brown accept to maximize value of the firm?

b. What are the IRRs of each project? Which project should be chosen using IRR as the selection criterion?

c. What are disadvantages of Payback Period (PBP), Net Present Value (NPV) and Internal rate of return (IRR).