Deliverable: On anything you do in excel, please submit your spreadsheets showing all calculations of incremental EBIT and Free Cash Flow.

___________________________________________________________________________

Question 1 - Project Selection Rules

You are analyzing two projects with the cash flows shown below.

Please construct an NPV chart with discount rates from 1% - 25%.On your NPV chart, please identify and label the following points:

a.The IRR of project 1 (calculate the value and label the value on the chart)

b.The IRR of project 2(calculate the value and label the value on the chart)

c.The discount rate at which the NPV of the two projects is equal - i.e., the NPV of project 1 is equal to the NPV of project 2.(calculate the value and label the value on the chart)

Questions related to the two projects (and the NPV chart):

d.Which project has the "steeper" NPV line as a function of the discount rate?Why does this project have a steeper NPV line as a function of the discount rate?

e.If you can only do one of the two projects, which project will you do if your firm's cost of capital is 6%?Why?

f.If you had no capital constraints (i.e., if you had unlimited funds), which projects would you do if your firm's cost of capital was 10%?

g.If you could only do one project, which project would you do if your firm's cost of capital was 10%?Why?

h.Which projects would you do if your firm's cost of capital was 16%?Why?

Question 2 - the NPV of an MBA

You are considering attending business school.Of course it will be fun to escape the daily work grind for a couple of years, but bottom line you hope to make a business decision regarding an MBA (it seems only fitting).

If you compare your salary over the next five years based on attending vs not attending B School, you believe it will look like this:

Years here are August 1 - July 31.The idea is that at the end of year 1, you will have an internship where you will make $7,000.At the end of your 2, you expect to take June and July off and start your new job on August 1 (beginning of year 3).In your first year at your new job you will make $85,000 but also get a $10,000 signing bonus.In your second year you will get a raise to $90,000, but no signing bonus.Use end of year timing for compensation cash flows.

Your expenses over your two years of B school will be $38,000 in the first year, and $35,000 in the second year.Assume that these expenses are after-tax, and you pay the expenses at the beginning of the year in each of your two B-school years.

Because you're a student, assume that your living expenses will be $5,000 less per year in each of the next two years.This again is after-tax money you will be saving.Assume timing on the cost of living savings is end of year 1 and end of year 2.

At the end of five years, let's assume that your salary will grow at 4% per year if you have an MBA, but at only 3% per year (a little more than inflation) if you don't have an MBA.Use a 30% tax rate for all years, and an 8% discount rate.For your salary projections, use end of year timing for CFs.

You are 30 years old now, and you expect to work for 28 years (until you're 60) after you graduate from B-school.Let t₀ be the day you incur all expenses for the first year, and assume all your salary amounts come at year end.

What is the NPV of going to B-school?