Question

Your firm is looking at 3 projects, each costing $500,000: A is estimated to save $125,000 per year for 5 years; B is estimated to save $75,000 for 6 years plus generate tax savings of $20,000 per year; C is estimated to save $75,000 per year for 10 years but requires additional corporate overhead of $10,000 per year.

(a) Compare the cash flows for the 3 projects and choose all that will meet your decision rule at a corporate cost of capital of 12.0 %.
(b) What changes if the cost of capital rises to 15.0%?
(c) If we deduct income taxes of 25% on the net savings; does this change your results?
(d) if 2 projects like these both have acceptable NPV but only 1 can be accepted, which one do you select?

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