CASE 2 (25 points)

The treasurer of Arnaud Corporation has projected the cash flows of Projects A and B as follows:

	C0	C1	C2	C3
Project A	-285,000	170,000	100,000	160,000
Project B	-285,000	110,000	180,000	200,000

The relevant discount rate is 12 percent. The company imposes a payback cut-off of two years for its investment projects.

Instructions:

1. If these two projects are independent, which project(s) should Arnaud accept based on:

a. The Payback rule? Explain. (5 points)

b. The Profitability Index rule? Explain. (5 points)

c. The IRR rule? Explain. (5 points)

d. The NPV rule? Explain. (5 points)

2. If these two projects are mutually exclusive, which project should Arnaud accept? Explain. (5 points)