The software application development company for which you workis evaluating two different options for starting a new applicationdevelopment within the upcoming year. The company seeks to earn areturn on each project that exceeds its cost of capital of 6.5 %.Further, the company assumes that given the current economicconditions, inflation may be expected to grow by 1% for the nextyear. Assume that the project takes place in Year 0 and beginsearning cash flows on its application product from years 1 through5.
Project Cash Flows | Year 0 | Y1 | Y2 | Y3 | Y4 | Y5 |
|---|
| Project A | (-$50,000.00) | $5,000.00 | $10,000.00 | $20,000.00 | $30,000.00 | $65,000.00 |
|---|
| Project B | (-$65,000.00) | $15,000.00 | $20,000.00 | $40,000.00 | $45,000.00 | $25,000.00 |
|---|
Answer the following questions based on the analysis of thegiven cash flows for Project A versus Project B:
What is the NPV for each proposed project?
Which project would you select based on the NPV?
Alter the discount rate based on the method presented in thevideos in the Financial Analysis Tools section below so that youreach an NPV of "0" (or close to "0") thereby arriving at theproject IRR. Which IRR is higher?
If inflation were not a factor, would your results change?
