2. Suppose you have the following two mutually exclusive projects that you can

carry out on the corner of 39th Street and Walnut Street: Build a day care center

or a health spa. Suppose the day care center has the following cash flows: An

immediate cash outlay of $5,000 followed by inflows of $2500 in each of the next 3

years and zero thereafter. Suppose the health spa has the following cash flows: An

immediate outlay of $5000 followed by inflows of nothing in year one, $1,000 in

year 2 and $7,100 in year 3 and zero thereafter. Answer the following questions:

(a) Show that the IRR of the day care project is 23.4%. Is the IRR for the

health spa lower or higher than the IRR for the day care project?

(b) If you base your investment decision on which investment has the highest

NPV, which do you choose when the discount rate is 15% and which do you

choose if the discount rate is 5%?

(c) Suppose you could triple the size of the health spa project and triple its

revenues but you can't change the size of the day care center. Would any of

your answers in (1) or (2) change?