Your firm is comparing two investment opportunities, Project 1 and Project 2. The projects have the following estimated cash flows:

Project 1:

• Year 0: $(250)
• Year 1: $60
• Year 2: $80
• Year 3: $100
• Year 4: $120
• Year 5: $140

Project 2:

• Year 0: $(200)
• Year 1: $50
• Year 2: $70
• Year 3: $90
• Year 4: $110
• Year 5: $130

The required rate of return is 11%.

a. Explain the concept of capital budgeting. b. What is the difference between the traditional payback period and the discounted payback period? c. Calculate the traditional payback period for both projects. d. Calculate NPV and IRR for both projects. e. Which project should be selected based on NPV and IRR?