Mitchell, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £80,000, while Project 2 requires an investment of £90,000.
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 } & £ 30,000 & £ 50,000 & £ 70,000 & £ 90,000 \\\text { Variable costs } & 8,000 & 12,000 & 20,000 & 25,000 \\\text { Fixed costs } & 12,000 & 10,000 & 10,000 & 10,000\end{array}

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\text { PROJECT } 2

\begin{array}{lrrrr}\text { YEAR }&1&2&3&4\\\text { Revenues } & £ 65,000 & £ 80,000 & £ 60,000 & £ 40,000 \\\text { Variable costs } & 15,000 & 30,000 & 14,000 & 12,000 \\\text { Fixed costs } & 5,000 & 20,000 & 10,000 & 8,000\end{array}

The company estimates that at the end of the fourth year Project 1 would have a salvage value of £10,000 and Project 2 would have a salvage value of £5,000.
a.Determine the net present value of EACH project using an 8 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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