1.Princess Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the second is about an advertising campaign. The cash flows associated with each project appear below.

Quality Improvement Project

Advertising Campaign

Cash Outflow

-100,000

-100,000

Year 1

10,000

P80,000

Year 2

30,000

45,000

Year 3

125,000

10,000

[A] Suppose the hurdle rate of the firm is 10%. Calculate the cash flows of the "incremental project" by subtracting the cash flows of the second project from the cash flows of the first project. What is the IRR of the incremental project?

[B] Suppose the hurdle rate of the firm is 10%. If the two projects are mutually exclusive, which project should be chosen? What is the problem that the firm should be concerned with in making this decision?