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Madrid Ltd. is trying to decide between two projects. Madrid uses a 12% discount rate. The following information is available on the two projects: Project

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Madrid Ltd. is trying to decide between two projects. Madrid uses a 12% discount rate. The following information is available on the two projects: Project IBIZA Project MALLORCA Investment in equipment $40.000 550.000 Net annual cash inflows $8.400 $10,000 Life of the project 8 years 10 years Salvage value of equipment SO $5,000 Present value factors for a discount rate of 12%: 8 years Annual cash flows 4.9676 One-time cash flows 0.4034 10 years 9 years 5.3283 0.3606 5.6502 0.3220 Required: a. Calculate the net present value (NPV) of each project. (Ignore income taxes for this analysis.) 7 marks b. Which project should Madrid select? Explain why. 2 marks

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