Part 1

You are given the following cash flows (C₀ to C₃ for year 0 to 3) for project A, B and C:

	C0	C1	C2	C3
A	-2 000	2 000	1 500	1 000
B	-3 000	1 000	2 000	3 000
C	-5 000	2 000	3 000	4 000

a) Assume a discount rate of 10%. Calculate the Net Present Value (NPV) and rank the 3 projects using NPV. Which project(s) should you invest in?

b) Rank the 3 projects using the Profitability Index (PI). Which project(s) should you invest in?

c) If you can only invest 5 000 which project(s) should you invest in? Show your calculations.

The company needs a new machine for its production. There are 2 alternatives:

1. Crafty, which costs only $1 000 to install and $100 in yearly maintenance, but have to be replaced every year.

2. Blunt, which costs $2 000 to install, $500 in yearly maintenance and lasts for 5 years.

d) Assuming a discount factor of 10% and that the two systems deliver the same quality, which of the alternatives provide the most cost efficient alternative? Explain your answer