1. Are there any similarities between a firms capital budgeting decisions and an individuals investment decisions?

2. What is each projects IRR? According to IRR, which project(s) should be accepted if they are independent?

Mutually exclusive? Would the projects IRRs change if the WACC changed?

3. What is each projects NPV? According to NPV, which project(s) should be accepted if they are independent?

Mutually exclusive? (10 points)

You recently went to work for Alien Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project Sinvolves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Alien is planning to introduce entirely new models after 3 years. Here are the projects' after-tax cash flows (in thousands of dollars): 0 1 3 2 + + Project L -$200 $20 $120 $160 Project S -$200 $140 $100 $40 Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Alien's WACC is 10%. You must determine whether one or both of the projects should be accepted