1) Table A gives investments, NPVS, IRRs and the first three years' cash flow for several capital investment projects. Each project's cash flows continue for several more years, longer for some projects than others. The cost of capital is 12% for all projects. Table A (figures in millions). Project Invest in 2000 C1 C2 C3 NPV IRR 100 20 20 20 57 17.8 200 20 64 14.5 50 20 20 20 41 37.8 75 -10 10 30 0 12 E 30 -10 -3 11 F 10 5.5 30.2 0 5 4 3 5 Projects A and B are mutually exclusive - your firm can take only one. The projects are discrete you cannot make partial investments in any project. (a) Suppose the firm rejects all projects with payback periods greater than 3 years. What is the NPV from following this policy? (b) A manager defends the decisions in part a as a way to avoid taking on risky projects. Does this defense make sense? (c) Which project would you choose, A or B? (d) Suppose that the firm now identifies a new project AA with exactly the same cash flows, NPV and IRR as project A. Does the opportunity to invest in AA change your answer to part c? (e) Suppose the firm has only $200 million to invest - a fixed capital constraint. Which projects would you undertake? (Ignore project AA.) (f) Now the firm negotiates a line of credit that allows it to borrow up to $100 million at 8%. Would access to additional debt capital at a cost of 8% change your answers to questions c, d or e? Explain each answer briefly| 1) Table A gives investments, NPVS, IRRs and the first three years' cash flow for several capital investment projects. Each project's cash flows continue for several more years, longer for some projects than others. The cost of capital is 12% for all projects. Table A (figures in millions). Project Invest in 2000 C1 C2 C3 NPV IRR 100 20 20 20 57 17.8 200 20 64 14.5 50 20 20 20 41 37.8 75 -10 10 30 0 12 E 30 -10 -3 11 F 10 5.5 30.2 0 5 4 3 5 Projects A and B are mutually exclusive - your firm can take only one. The projects are discrete you cannot make partial investments in any project. (a) Suppose the firm rejects all projects with payback periods greater than 3 years. What is the NPV from following this policy? (b) A manager defends the decisions in part a as a way to avoid taking on risky projects. Does this defense make sense? (c) Which project would you choose, A or B? (d) Suppose that the firm now identifies a new project AA with exactly the same cash flows, NPV and IRR as project A. Does the opportunity to invest in AA change your answer to part c? (e) Suppose the firm has only $200 million to invest - a fixed capital constraint. Which projects would you undertake? (Ignore project AA.) (f) Now the firm negotiates a line of credit that allows it to borrow up to $100 million at 8%. Would access to additional debt capital at a cost of 8% change your answers to questions c, d or e? Explain each answer briefly|