7. (30 points) A firm Bumble Bee, has the following projects in a different industry. The current beta risk for the Bumble Bee is 0.95 with T-bill rate as 2% and the market index return as 12%. A typical firm, Tonics, in that industry has a beta risk of 2.5 and finances with debt ratio as 1/3 with interest rate as 4% given that the corporate income tax rate as 15%.

Since the firm's consultant estimates the risk is higher for the projects' expected cash flows. Given that the firm originally is full equity in the sense that they only finance the capital by issuing stocks. Now they are attempting a new venture. Answer the following questions. Both projects have an initial outlay of $12 million dollars.

Table 2 (in millions)

	Year 1	Year 2	Year 3	Year 4
Project 1	-6	1	18	23
Project 2	-4	3	10	31

a) If you considered risk-adjusted capital budgeting, which project would you suggest? Is IRR a good decision rule for this case? Why or why not?

b) If you apply the payback period for the company since the company is relatively small, which project would you suggest? How about the discounted payback period?