Your clients husband is investigating the possibility of installing a new advanced computing system to improve the customer services in his company. You have been given the following information for evaluation: Project A Project B CAPEX / Initial Outlay $400,000 $200,000 Project life 8 years 5 years Operating Expense $75,000 $100,000 Revenue (per year) $300,000 $400,000 Variable costs $100,000 $200,000 Investment in Net Working Capital (Year 0) $50,000 $100,000 The companys tax rate is 30% and it employs a straight line depreciation method. The computing system will not have any value at the end of the projects life. The company also has a required rate of return equal to 11% per annum.

REQUIRED: a) Determine the Free Cash Flows (FCFs), for each year, to the firm for both projects. (8 marks)

b) Based on your calculated FCFs, calculate the Net Present Value of the project and identify which of the projects you would recommend. (7 marks)

c) Why cant the NPVs of unequal-life, mutually exclusive projects be compared? Which method should we use instead? (5 marks)