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Your division is considering two investment projects, each of which requires an up-front
expenditure of $25 million in Year 0. You estimate the cost of capital is 10% and the
investments will produce the following after-tax cash flows (in millions of dollars):
Year Project A Project B
1 5 20
2 10 10
3 15 8
4 20 6
c. (1) If the two projects are independent and the cost of capital is 10%, which project or
projects should the firm undertake when evaluated by the NPV and IRR criteria? (2)
Why? Display the 2 NPVs and IRRs.
d. (1) If the two projects are mutually exclusive and the cost of capital is 10%, which, if
any, project should the firm undertake when evaluated by the NPV and IRR criteria? (2)
Why? (3) If you selected a single project, why did you not select both projects?
e. In part (d), if the NPV and IRR criteria suggest a different priority ranking and
different choices, to what do you attribute this conflict [in one sentence]?
f. If the two projects are mutually exclusive and the cost of capital is 15%, which project
should the firm undertake? Display the two NPVs.
Annual
Period Cash Flows Cumulative
0 ($25,000) ($25,000)
1 5,000 (20,000)
2 10,000 (10,000)
3 15,000 5,000
4 20,000 25,000