Calculate payback period for each project and recommend

Reference no: EM131969209

Problem

RARE Ltd considering investing between two mutually exclusive projects, project Alpha and Project Beta. Both projects have a useful life of 5 years. The company's target payback period is 3 years.

The cash flow associated with the project are as follows:

Cash Flow                  Project Alpha             Project Beta
Initial investment         (R500,000)               (R500,000)
Year 1:                        150,000                  300,000
Year 2:                        200,000                  225,000
Year 3:                        125,000                  350,000
Year 4:                        300,000                  150,000
Year 5:                        250,000                  90,000

Required:

a) Calculate payback period for each project and recommend which project RARE should select.
b) Calculate the net present value for each project and recommend which RARE should select on this method.

Reference no: EM131969209

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