Canadian Metal, Mining and petroleum company are analyzing two projects for possible investments. Only one investment will be made. The first project is an oil drilling project in Alberta at a cost of $500 million that will produce $100 million per year in years 5 through 10 and $200 million per year in years 11 through 20. The second project is an expansion of an aluminum smelter in Mapletree, Quebec, and will cost $500 million and will produce $87 million per year for years 2 through 20. The cost of capital is 12 percent.

a.Which investment should be made?

b.If the oil-well project justifies an extra 4 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of flows, does the investment decision change?