Reference no: EM132962008

The following projects are available, but only one can be chosen. The cost of capital in all cases is16%.

Project A: An initial investment of $180,000 followed by profits of $30,000 in years one to four, $40,000 in years five to seven, and $50,000 in years eight to ten.

Project B: An initial investment of $335,000 followed by profits of $65,000 in years one to three, $85,000 in years four to six, and $110,000 in years seven to eight.

Project C: An initial investment of $372,000 followed by profits of $150,000 in years four to nine and a residual value of $70,000 in the ninth year.

Problem 1: Using an appropriate decision-making technique, recommend which project should be selected. How much better is the chosen alternative over the worst alternative?

Problem 2: If a new lower cost of capital equal to 11% is used, what decision do you reach?