Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital budgeting proposals. Since this is your first assignment, you have been asked not only provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of capital budgeting process.

Caledonia Inc. is manufacturing a consumer product, the demand for which at current price is in excess of its ability to produce. The capacity of a particular machine, now due for replacement, is the limiting factor on production. The possibilities exist either of acquiring a similar machine (Project X) or of purchasing a more expensive machine with greater capacity (Project Y). The cash flows under each alternative have been estimated and given below. The companys opportunity cost of capital is 10%, after tax. In deciding between the two alternatives the Managing Director favors the pay back method.

The Chief Accountant, however, thinks that a more specific method should be used and he has calculated for each project:

1. NPV and (ii) Profitability Index

Having made these calculations, however, he finds himself still uncertain about which project to recommend. You are required to make these calculations and to discuss their relevance to the decision to be taken. The relevant cash flows are:

Year	Project X	Project Y
0	Rs. 27,000	Rs. 40,000
1	-----	Rs. 15000
2	Rs. 10000	Rs. 14000
3	Rs. 22000	Rs. 16000

iii) Would the NPVs change if the cost of capital changed?