Your company is presented with two proposals, ABC and XYZ, with equal risks that require initial investments of $95,000 and $100,000 respectively. Assume a cost of capital of 14%. Subsequent after tax end-of-year net cash inflows are given as follows:

Year Proposal ABC Proposal XYZ

1 $32,500 $30,000

2 35,000 30,000

3 35,000 30,000

4 35,000 30,000

Required:

*****READ VERY CAREFULLY*****

1) (10 marks)

(a) Place your answer for each of the proposals by ranking method in the table below.

(b) For each ranking method, what is the better choice? ABC or XYZ? Circle the better choice.

(There should be only ONE answer circled PER row.)

Ranking Method	Proposal ABC	Proposal XYZ
Payback
Net Present Value
Internal Rate of Return
Profitability Index

(NOTE: Show all your work on the next page. No marks without supporting calculations.)

2) (2 marks)

If mutually exclusive projects are being evaluated, NPV and IRR criteria may not always lead to the same accept/reject decision. Explain. (Marks will be awarded on the basis of explanation.)