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Watertown. Inc. was founded in May 2005 by Lawrence Rollins. Mr. Rollins received an unexpected inheritance of $2,000,000 in January 2005. Soon after, he decidod to use his inheritance as Watertown's seed capital. Over the last few years, Watertown experienced rapid sales growth, although the company has anly recently shown positive net income. The company considers two alternative proecsses for manufacturing influtable tubes to service demand in a rapidly growing market. The first manufacturing process has a higher start-up cost than the second but greater economies of scale. The expected cash flows associated with this process are presented below in Table 1 . The second manufacturing process requires a smaller initial investment than the first. Because of the smaller initial investment, it is appealiag to some board members. The expected free cash flows associated with this process are presented in Table 2 below. After careful assessment of the risk associated with this project, you conclude that the appropriate cost of capital for both procesies is 14.25%. At the initial presentation, project leaders of both teams presented their cash flow projections. However, since the processes are mutually exclusive, the fimm can only accept one proposal. You have been asked to evaluate the two production processes and present your findings to the board of directots. Your CEO Charlie leamed capital budgeting techniques in his finance classes. You are confident that she is able to distinguish among competing investment decision rules and ase the appropriate criteria for decision-making. However, the founder and Chairman of the Board, Lawrence Rollins, has never been to business school. He prefers the second process because it costs less moncy up-front. Besides, several influential old-timers on the board are intrigued by the payback decision rule, which you believe contains significant shortcomings. Your job is to clearly articulate the rciative merits of each investatent decision criterion

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