Capital Budgeting (15 marks)

a) What are mutually exclusive projects and as a manager, how do you choose between two mutually exclusive projects? (3 marks).

(b) Alphalink Manufacturing Co., a producer of airplane parts, is considering two mutually exclusive plans for moving raw materials into its work area. Plan A involves investing $6,000,000 in a fully automated assembly line that will result in annual after-tax cash inflows of $2,700,000 per year. The fully automated assembly line has a useful life of 3 years. Plan B is for a system of conveyor belts to bring raw materials into the work area where they will be moved manually into the appropriate workstation. The conveyor belts are less costly, requiring an investment of $3,000,000. However, because of the labour intensity, the annual after-tax cash inflows will be only $1,020,000 per year. The conveyors have a lifetime of 5 years. If the firm's opportunity cost of capital is 12%, and its tax rate is 30%.

(i) What is the net present value of the projects? Which plan should be accepted? (8 marks)

(ii) Calculate the payback periods of both plans if cash flows occur evenly throughout the year. (4 marks)