Your boss, the chieffinancial officer (CFO) for Southern Textiles, has just handed youthe estimated cash flows for two proposed projects. Project Linvolves adding a new item to the firm’s fabric line. It would takesome time to build up the market for this product, so the cashinflows would increase over time. Project S involves an add-on toan existing line, and its cash flows would decrease over time. Bothprojects have 3-year lives because Southern is planning tointroduce an entirely new fabric at that time.

Here are the net cash flow estimates(in thousands of dollars):

  Expected Net Cash Flows  Year            ProjectL              Project S

0                  $(100)                $(100)

1                       10                       70

2                       60                       50

3                       80                       20

The CFO also madesubjective risk assessments of each project, and he concluded thatthe projects both have risk characteristics that are similar to thefirm’s average project. Southern’s required rate of return is

10%. You must now determine whether oneor both of the projects should be accepted.

(2)    What is thedifference between the traditional payback and the discountedpayback?

What is each project’s discountedpayback?