Day Dreamer Accounting is looking at two potential projects to improve its business.

Project 1 would require an initial investment of $500,000. Over the 10 year project horizon the company expects annual cash inflows of $125,000. In year 5, the company expects there will be a one-time cash outflow of $350,000 for improvements.

Project 2 would require an initial investment of $750,000. In year 9, the company expects a cash inflow of $500,000 and in year 10 it expects a cash inflow of $2,000,000. This project would have a one-time cash outflow in year 4 for $275,000.

The companys cost of capital is 10%, which is an appropriate discount rate.

Required:

a) Compute the net present value of each project. (6 marks)

b) Assume the company has limited funds to invest and is considering two projects, both with positive net present values. Explain how the two projects should be ranked and evaluated (no calculations needed). (2 marks)