The Sander's Electric Company is evaluating two projects for possible inclusion in the firm's capital budget. Project M will requrie a $37,000 investment while project O's investment will Be $46,000. After-tax cash inflows are estimated as follows for the two projects:

Year Project M Project O

1 $12,000 $10,000

2 12,000 10,000

3 12,000 15,000

4 12,000 15,000

5 15,000

Determine the payback period for each project.

Payback (M) = $37,000/xx,xxx= x.xx years

Payback (O) = x years + 11,000/15,000 = x.xx years

Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the projects is acceptable?

NPV (M) = xx,xxx PVIFA ________xx,000 = $12,000 3.170 37,000

= $x,xxx

PI(M) = $38,040/xx,000 = x.xxx

NPV(O) = $10,000 PVIFA _________ + 5,000 (PVIF(10%,3)

+ PVIF(10%,4) + PVIF(10%,5)) xx,xxx

= 10,000 3.791 + 5,000(.751 + .683 + .621) xx,xxx

= $48,185 46,000 = $2,185

PI(O) = 48,185/xx,000 = x.xxx

Both projects have positive NPVs, so both are acceptable.

c. Determine the internal rate of return and modified internal rate of return for Projects M and O.

USE Formulas in Text