The conference on evaluating capital projects has been very helpful. You have received a significant amount of information and multiple projects to evaluate to hone your skills. To adequately teach Grammy and the Board you will need to answer several questions about the capital-budgeting process. You will do this in a business memo that is no more than four pages long.

Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to a highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows:

	Project A	Project B
Initial outlay	-$110,000	-$110,000
Inflow year 1	20,000	40,000
Inflow year 2	30,000	40,000
Inflow year 3	40,000	40,000
Inflow year 4	50,000	40,000
Inflow year 5	70,000	40,000

In evaluating these projects, please respond to the following 12 questions:

1-Why is the capital-budgeting process so important?

2-Why is it difficult to find exceptionally profitable projects?

3-What is the payback period on each project? If the organization imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?

4-What are the criticisms of the payback period?

5-Determine the NPV for each of these projects. Should they be accepted?

6-Describe the logic behind the NPV.

7-Determine the PI for each of these projects. Should they be accepted?

8-Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not?

9-What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased?

10-Determine the IRR for each project. Should they be accepted?

11-How does a change in the required rate of return affect the projects internal rate of return?

12-What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?