Two New Software Projects Are Proposed To A Young Engineer Without Answer

Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?

3. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.

4. You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Below is the cash flow information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why?

Omega

Alpha

Year
Inflow
Outflow
Netflow

Year
Inflow
Outflow
Netflow
Y0
0
$225,000
-225,000

Y0
0
$300,000
-300,000
Y1
0
190,000
-190,000

Y1
$50,000
100,000
-50,000
Y2
$150,000
0
150,000

Y2
150,000
0
150,000
Y3
220,000
30,000
190,000

Y3
250,000
50,000
200,000
Y4
215,000
0
215,000

Y4
250,000
0
250,000
Y5
205,000
30,000
175,000

Y5
200,000
50,000
150,000
Y6
197,000
0
197,000

Y6
180,000
0
180,000
Y7
100,000
30,000
70,000

Y7
120,000
30,000
90,000
Total
1,087,000
505,000
582,000

Total
1,200,000
530,000
670,000