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JK Products is evaluating an investment in either of twocompeting projects that will allow the company to eliminate aproduction bottleneck and meet the growing demand for its products.The company’s engineering department narrowed the alternatives downto two –MD and HD. A project specialist developed the followingestimates of cash flows for MD and HD over the relevant six-yeartime horizon. The company has an 11% required return and viewsthese projects as equally risky.

	Project MD	Project HD
Initial Outflow (CF0)	R670,000	R940,000
Year (t)	Cash Inflows (CFt)
1	R250,000	170,000
2	200,000	180,000
3	170,000	200 000
4	150 000	250 000
5	130 000	300 000
6	130 000	550 000

Required:

2.1.Calculate the net present value (NPV) of each project,assess its acceptability and indicate which project is best, usingNPV.

2.2. Calculate the internal rate (IRR) of each project, assessits acceptability and indicate which project is best, usingIRR.

2.3.Calculate the profitability index (PI) of each project,assess its acceptability, and indicate which project is best, usingPI.

2.4.Draw the NPV profile project SQ and HT on the same set ofaxes and use this diagram to explain why the NPV and the IRR showdifferences for these two mutually exclusive projects. Discuss thisdifference in terms of both the “scale problem” and the “timingproblem”.

2.5.Which of the two mutually exclusive projects would yourecommend that JK Products undertake? Why?