Cat Corporation estimates that its discount rate is 20%. The company is considering two independent projects whose after-tax cash flows are as follows: (amounts in brackets represent negative cash flows)

Year Project S Project L

0 ($10,000) ($10,000)

1 10,000 5,000

2 10,000 20,000

3 10,000 (10,000)

4 10,000 10,000

Questions to be answered:

1. Calculate the Payback Period of project S and project L. If the acceptance period is 1.5 years, which project(s) do you choose?
2. Calculate the Profitability Index of project L.
3. Calculate the NPV of both projects?
4. Which project (s) do you choose based on your NPV results in part ?