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: New Financial Analysts

$$From: Mr$.$ V$.$ Morrison, CEO, Caledonia Products

$$Re: Capital$-$Budgeting Analysis

Provide an evaluation of two proposed$$ projects, both with $5-$year expected lives and identical initial outlays of $$$$110$ comma $000.$ Both of these projects involve additions to$$ Caledonia's highly successful Avalon product$$ line, and as a$$ result, the required rate of return on both projects has been established at $13$ percent. The expected free cash flows from each project are shown in the popup$$ window: LOADING....

In evaluating these$$ projects, please respond to the following$$ questions:

a$.$ Why is the$$ capital$-$budgeting process so$$ important?

b$.$ Why is it difficult to find exceptionally profitable$$ projects?

c$.$ What is the payback period on each$$ project? If Caledonia imposes a $4-$year maximum acceptable payback$$ period, which of these projects should be$$ accepted?

d$.$ What are the criticisms of the payback$$ period?

e$.$ Determine the NPV for each of these projects. Should either project be$$ accepted?

f$.$ Describe the logic behind the NPV$.$

g$.$ Determine the PI for each of these projects. Should either project be$$ accepted?

h$.$ Would you expect the NPV and PI methods to give consistent$$ accept$/$reject decisions? Why or why$$ not?

i$.$ What would happen to the NPV and PI for each project if the required rate of return$$ increased? If the required rate of return$$ decreased?

j$.$ Determine the IRR for each project. Should either project be$$ accepted?

k$.$ How does a change in the required rate of return affect the$$ project's internal rate of$$ return?

l$.$ What reinvestment rate assumptions are implicitly made by the NPV and IRR $$methods$?$ Which one is$$ better?