Maxim, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £40,000, while Project 2 requires an investment of £30,000. Cash revenues and cash costs for each project are shown below.

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\text { PROJECT } 1

\begin{array}{lrrrr}\text { YEAR }&1&2&3&4\\\text { Revenues } & £ 13,000 & £ 18,000 & £ 35,000 & £ 25,000 \\\text { Variable costs } & 7,000 & 9,000 & 12,000 & 12,000 \\\text { Fixed costs } & 1,000 & 2,000 & 3,000 & 1,000\end{array}

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\text { PROJECT } 2

\begin{array}{lrrrr}\text { YEAR }&1&2&3&4\\\text { Revenues } & £ 22,000 & £ 38,000 & £ 16,000 & £ 9,000 \\\text { Variable costs } & 12,000 & 21,000 &8,000 &5,000 \\\text { Fixed costs } &4,000 & 3,000 & 2,000 & 1,000\end{array}

The company estimates that at the end of the fourth year Project 1 would have a salvage value of £3,000 and Project 2 would have a salvage value of £1,000.
a.Determine the net present value of EACH project using a 16 per cent discount rate.
b.Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

A Firm Is Considering a Project with Annual Cash Flows

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