Consider the following information.

In order to satisfy a sharp increase in demand due to the end of the pandemic, LLC is evaluating investing in one of two major projects; these projects will be called Project A and Project B$.$ In order to mitigate risk, LLC has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $$2\mathrm{.}5$m as a fixed fee for her expert consulting services.

Project A has an initial outlay of $$45$ million and Project B has an initial outlay of $$60$ million.

Project A will generate additional revenues of $$25$ million starting at the end of year $1$ until the end of year $10.$ It will also incur additional working capital expenses of $$75$ million immediately, this working capital will be recovered at the end of the project.

Project B will generate additional revenues of $$35$ million starting at the end of year $1$ until the end of year $10.$ It will also incur additional working capital expenses of $$90$ million immediately, this working capital will be recovered at the end of the project.

The operating costs of both projects will be $20\%$ of the revenues from years $1$ to $10.$ Both projects will be depreciated on a straight line basis over ten years to zero book value. LLC has estimated that some assets involved in the upgrades can be sold at the end of year $10$ respectively for $$25$ million $($Project A$)$ and $$35$ million $($Project B$).$ The tax rate is $30\%.$ All cash flows are annual and are received at the end of the year. The cost of capital for both projects is $11\%.$

$1.$ Calculate the FCFs for each project.

$2.$ What is the NPV for each project?

$3.$ What is the discounted payback period for each project?

$4.$ What is the IRR for each project?

$5.$ Assume that the risk of investing in these projects is higher than the overall risk of LLC$.$ What would happen to the discount rate and consequently NPV of the two projects if this was the case? Explain your answer.

$6.$ Suppose that LLC has a payback rule of $3$ years. Based on all of your analysis, which project should be chosen? Justify your answer.