The board of RST Ltd needs to select between two projects. The company’s cost of capital is 8% and the tax rate is 26%. The projects are described as follows:

Project Alpha:

• Initial Cost: $800,000
• Expected Life: 7 years
• Annual Income before Depreciation & Tax: $175,000
• Depreciation: Straight line basis

Project Beta:

• Initial Cost: $1,200,000
• Expected Life: 5 years
• Annual Income before Depreciation & Tax: $220,000
• Depreciation: Straight line basis

Requirements:

1. Calculate the payback period.
2. Calculate NPV.
3. Calculate IRR.
4. Compare the cash flows.
5. Decide which project to invest in.