Your division is considering 2 investment projects, each which requires an upfront expenditure of $25 million. You estimate the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars). Year Project A Project B 0 -$25 -$25 1 $5 $20 2 $10 $10 3 $15 $8 4 $20 $6 IRR 27% 36.15% a) What is the regular payback period for project A? (3 marks) b) What is the discounted payback period for project A? (3 marks) c) If the projects are mutually exclusive and the cost of capital is 10%, which project or projects would you undertake? Use NPV to make the decision. Given NPV of Project B is $11.55. (3 marks) d) If the projects are independent and the cost of capital is 10%, which project should the firm undertake? Use NPV to make the decision. (2 marks) e) Calculate the profitability index (PI) for project A. Assume PI for project B is 1.46. Based on the PI, what is your recommendation concerning these projects if these projects are independent? Show your work.
