CHAPTER 9 Your boss, the chief financial officer (CFO) for Southern Textiles, has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's fabric line. It would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3year lives because Southern is planning to introduce an entirely new fabric at that time. Here are the net cash flow estimates (in thousands of dollars): The CFO also made subjective risk assessments of each project, and he concluded that the projects both have risk characteristics that are similar to the firm's average project. Southern's required rate of return is 10%. You must now determine whether one or both of the projects should be accepted. Start by answering the following questions: f. (1) Construct the NPV profiles for Project L and Project S. At what discount rate do the profiles cross? (2) Look at the NPV profile graph without referring to the actual NPVs and IRRs. Which project or projects should be accepted if they are independent? Mutually exclusive? Explain. Do your answers differ depending on the discount rate used? Explain. g. (1) What is the underlying cause of ranking conflicts between NPV and IRR? (2) What is the reinvestment rate assumption, and how does it affect the NPV versus IRR conflict? (3) Which capital budgeting method should be used when NPV and IRR give conflicting rankings? Why? h. (1) Define the term modified internal rate of return (MIRR). What is each project's MIRR? (2) What is the rationale behind the MIRR method? According to MIRR, which project or projects should be accepted if they are independent? Mutually exclusive? (3) Would the MIRRs change if the required rate of return changed