Question: Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual

  1. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?
  2. Assume that the rate of inflation is 6%, use the Net Present Value (NPV), approach to calculate the payback period for both projects. Which project would you now recommend? Why?
  3. In your estimation, which approach to calculating payback period is better? Explain your response, giving the pros and cons of each approach.

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