1. Your boss prefers IRR since it is simple to understand. You are writing a short memo to argue for the use of NPV. Please write a draft of that email.

2. Your consulting firm, Very good consultants, have been hired by Lil Sebastians (LILS), a manufacturer of children toys. LILS is evaluating manufacturing and selling a line of toy horses. Three years ago, the company paid $3.1 million to acquire a building downtown in anticipation of opening a indoor playground, the plans for this project have been put on hold. Based on a recent appraisal, the company believes it could sell the building for $2.3 million on an after-tax basis. In four years, the building could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the market for toy horses at a cost of $525,000. The marketing firm believes that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. They believe that we can capitalize on the strong market for toy horses and the Lil Sebastian name and charge a premium price of $750. Though they believe this is a fad and that sales should be discontinued after four years. The fixed costs per year for this project are $415,000 and variable costs are expected to be 15% of sales. The equipment to produce to toy horses will cost $2.5 million and will be depreciated according to a three-year MACRS schedule. We believe we can scrap this equipment for $350,000 at the end of the project. The toy horses would be sold manufactured and sold in the downtown building. LILS will require an immediate $125,000 from NWC. The marginal tax rate is 22% and they require a 11% return. Should LILS build toy horse? Why?

3.. You and your best friend are considering dropping out of college to pursue a new business venture. Youve calculated expected future cash flows if you stay in college and if you pursue your business venture. Your friend thinks you should include the cost of college to this point in your calculation. Should you? Why or why not?