Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the racquets. This method will produce a $24M cashflow next year. The firm could also choose a new experimental method for producing racquets. This method has lower costs if it works. If the new technology works it will produce a cashflow of $28M next year. If it is unsuccessful it will produce a zero cashflow next year. The probability of success is 0.8 and the cashflows are uncorrelated with the market return. Both methods require a $20M dollar investment today. There are no cashflows after next year. The risk-free rate is 10%. The market price of risk is 8.4%.

(a) What is the NPV of the two projects? Which project should an all equity firm choose? Hint. You will have to determine the discount rate for both technologies [5 Marks]