Reference no: EM132620276

The Nelson Company is considering two mutually exclusive projects. The projected cash flows are as follows:

Year                            Cash Flow A                            Cash Flow B

0                              -$280,000                            -$250,000

1                                  $60,500                            $50,000

2                                  $75,000                            $35,000

3                                   $80,000                            $70,000

4                                  $95,000                                $150,000

Question 1:

a. The company uses a discount rate of 8%. Should the company go ahead with either project? Why or why not?

b. If the company's discount rate is 4.5%, should it go ahead with either project and if so which is the better one?

Question 2: Jane plans to open a bike repair shop in Scarborough. She will operate the shop for five years and then she plans to move to the coast. The repair equipment will cost $95,000 and Jane expects the after tax cash flows to be $26,200 a year.

a. What is the payback period for the project?

b. Assuming a required rate of return of 9.5% for her project what is the IRR?

c. What are the advantages/disadvantages of using each method? Explain