10.7. As a regional managing director of Finco, a U.S.-

based investment company, your mandate is to scour the Midwest in search of promising investment opportunities and to recommend one project to corporate headquarters in Los Angeles.

Your analysts have screened thousands of prospective ventures and passed on the following four projects for your final review:

Cash Flows (in $millions)
Years from Now: 0 1 2 3 4 5 Project 1 40 10 10 15 15 20 Project 2 25 5 5 10 15 15 Project 3 20 5 5 5 10 15 Project 4 15 3 3 6 6 13 Zero-coupon yields (%) — 5% 5% 6% 6% 5%

a. Calculate the NPV, hurdle rate, and IRR for each project. Which project appears most promising?

b. Determine NPVs using pairwise project comparisons to verify your decision from part a.

c. How would your answer change if all projects could be scaled and you have a year 0 budget constraint of $50 million? (Hint: Calculate profitability indexes.)