Consider the following information. In order to satisfy a sharp increase in demand because of the end of the pandemic, QAN is evaluating investing in a major upgrade of its airplanes. QAN has already identified two strategies they may follow in doing their upgrades; these strategies will be called Project A and Project B. In order to mitigate risk, QAN has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $2m as a fixed fee for its consulting services. Project A has an initial outlay of $800 million and Project B has an initial outlay of $650 million. Project A will generate additional revenues of $250 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $100 million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of $200 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $120 million immediately, this working capital will be recovered at the end of the project. The operating costs of both projects will be 35% of the revenue from years 1 to 10. Both projects will be depreciated on a straight-line basis over ten years to zero book value. QAN has estimated that some assets involved in the upgrades can be sold at the end of year 10 respectively for $125 million (Project A) and $100 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 7%. 1. Calculate the FCFs for each project. (10 marks) 2. What is the NPV for each project? (5 marks) 3. What is the discounted payback period for each project? (2.5 marks) 4. What is the IRR for each project? (2.5 marks) 5. Assume that the risk of investing in these upgrades is higher than the overall risk of QAN. What would happen to the discount rate and consequently NPV of the two projects if this was the case? Why? (2 marks) 6. Suppose that QAN has a payback rule of 8 years. Based on your analysis in 2., 3. and 4. which project should be chosen? Justify your answer with reference to theory. What other factor might affect the final decision