Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital-budgeting analysis department or are provided with remedial training. The memorandum you received outlining your assignment follows:

To: The New Financial Analysts From: Mr. V. Morrison, CEO, Caledonia Products Re: Capital-Budgeting Analysis

Provide an evaluation of two proposed projects, both with 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to Caledonias highly successful Avalon product line, and as a result, the required rate of return on both projects has been established at 12 percent.

The expected free cash flows from each project are as follows: PROJECT A PROJECT B Initial outlay $110,000 $110,000 Inflow year 1 20,000 45,000 Inflow year 2 30,000 45,000 Inflow year 3 40,000 45,000 Inflow year 4 50,000 45,000 Inflow year 5 70,000 45,000

Caledonia is considering two additional mutually exclusive projects. The free cash flows associated with these projects are as follows:

PROJECT A PROJECT B Initial outlay -$100,000 -$100,000 Inflow year 1 32,000 0 Inflow year 2 32,000 0 Inflow year 3 32,000 0 Inflow year 4 32,000 0 Inflow year 5 32,000 200,000

The required rate of return on these projects is 11 percent. 1. What is each projects payback period? 2. What is each projects NPV? 3. What is each projects IRR? 4. What has caused the ranking conflict? 5. Which project should be accepted? Why?

Must show calculations or steps in excel