1. Consider two projects with the following (after-tax) cash flows. Project A: CF1 = 50, CF2 = 55, CF3 = 85. Project B: CF1 = 140. Both projects require an initial investment of 100. Assume the cost of capital for both projects is r = 5%. (a) Compute NPV and IRR for project A. (b) Compute NPV and IRR for project B. (c) Assume you replicate project B twice, i.e. reinvest 100 in t = 1 and t = 2. Compute the NPV and IRR of the replicated project. (d) Consider again the 1-year project B. Compute the (annualized) modified IRR assuming a rein- vestment rate of 10%. (e) Convert project A and project B into equivalent annuities (see slide 47). Slide 47 is Below: Solution #2: equivalent annuities Hurdle rate for both projects: 12% Equivalent annuity for 5-year project: $442 = PV(A, 12%, 5y) A = $122.62 Equivalent annuity for 10-year project: $478 = PV(A, 12%, 10y) A = $84.60 1. Consider two projects with the following (after-tax) cash flows. Project A: CF1 = 50, CF2 = 55, CF3 = 85. Project B: CF1 = 140. Both projects require an initial investment of 100. Assume the cost of capital for both projects is r = 5%. (a) Compute NPV and IRR for project A. (b) Compute NPV and IRR for project B. (c) Assume you replicate project B twice, i.e. reinvest 100 in t = 1 and t = 2. Compute the NPV and IRR of the replicated project. (d) Consider again the 1-year project B. Compute the (annualized) modified IRR assuming a rein- vestment rate of 10%. (e) Convert project A and project B into equivalent annuities (see slide 47). Slide 47 is Below: Solution #2: equivalent annuities Hurdle rate for both projects: 12% Equivalent annuity for 5-year project: $442 = PV(A, 12%, 5y) A = $122.62 Equivalent annuity for 10-year project: $478 = PV(A, 12%, 10y) A = $84.60