You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

Year

Project(A)

Project (B)

0

-$30,000

-$30,000

1

13,000

5,000

2

11,000

5,000

3

9,000

5,000

4

7,000

5,000

5

0

5,000

6

7

8

9

10

0

0

0

0

0

5,000

5,000

5,000

5,000

5,000

The required rate of return is 10%.

(4 points) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.

(6). (4 points) What is the average accounting return (AAR) for each of the projects, assuming that cash flows occurring after year 0 are net income? Which project should be accepted if AAR method is applied? Also, assume that the target AAR is 20%.

(7). (4 points) Define and find the crossover rate.

(8). (7 points) Sketch the NPV profile. Plot all the relevant coordinates (i.e., the points on the x and y axis; and the cross-over rate) on the graph.