You are a Financial Analyst with ABC Ltd and the chief financialofficer (CFO) requests you to evaluate two new capital budgetingproposals. Specifically, you are asked to provide a recommendationand also respond to a number of questions aimed at assessing yourlevel of competence in capital budgeting process.

Instructions are as follows:

Provide an evaluation of two proposed projects, both withidentical initial outlays of $400,000. Both of these projectsinvolve additions to a client’s highly successful product line. Therequired rate of return on both projects is set at 11%. Theexpected after-tax cash flows from each project are as presented inthe table below.

	PROJECT X	PROJECT Y
Initial outlay	-$400,000	-$400,000
Inflow year 1	$80,000	$160,000
Inflow year 2	$140,000	$160,000
Inflow year 3	$130,000	$160,000
Inflow year 4	$160,000	$160,000
Inflow year 5		$160,000
Inflow year 6		$160,000

Distinguish between “required rate of return” and “internal rateof return”. Illustrate your answer with examples.

What is the payback period on each project? If ABC Ltd imposes a2.5-year maximum acceptable payback period, which of these projectsshould be accepted?

What are the main limitations of the pay back method ofvaluation. Despite these limitations, chief financial officers(CFOs) use it. Explain why.

Determine the NPV for each of these projects? Should theprojects be accepted? Explain.

Determine the IRR for each of these projects? Should theprojects be accepted? Explain.

Under what circumstances will the NPV and IRR offer differentrecommendations, and which recommendation is preferred? Carefullyexplain

How would you accommodate unequal lives of the project whiledetermining the NPVs of the project? Demonstrate usingcalculations.

Explain why unequal lives of projects make NPVs of the projectsincomparable.

Determine the profitability index for each of these projects?Should the projects be accepted? Explain.

Clarity of Presentation.