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4. Motor Inc. is considering two sites for its new production facilities. The opportunity cost of capital for this type of projects in the market
4. Motor Inc. is considering two sites for its new production facilities. The opportunity cost of capital for this type of projects in the market is 12%. Site A requires an immediate investment of $10M and will generate incremental opertating profits of $15M in year 1 and 2. If the firm invests in site B instead, the costs will be spread over two years because of the technical characteristics of the site. So the initial investment is $8M, and the profit in year 1 is reduced to $13M. The profit in year 2 remains unchanged. (a) Calculate the IRR of project B. (2 points) (b) At which rate should you discount the cash-flows of Project A? The IRR you found in (a) or the opportunity cost of capital? Explain. [3 points)
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