After-tax net cash flows for two mutually exclusive projects are as follows:

Year Project:EAGLES

0 (5000) (11,000)

1 10,000 70,000

2 40,000 (2000)

3 60,000 10,000

4 ---- (2000)

5 ---- 10,000

Both projects have somewhat greater risk than an average project for the firm. Additionally, management feels far more confident in their estimates of Project EAG's cash flows than in Project LES's.

a. Based on the cash flows and information above, discuss all complications that will be encountered in a capital budgeting analysis of these mutually exclusive projects.

b. How will you adapt your capital budgeting analysis to deal with each of the complications? Be specific in terms of the capital budgeting tools, methods, and adjustments you feel will be most appropriately used and why.