Jim Haslam, CEO of Abu Donuts, accepts a capital budgeting project proposed by the Abel Donut Division. This is the division in which the CEO spent his first 6 years with the company. On the same day, the CEO rejects a capital budgeting project proposal from the Cake Division. The manager of the cake Division is very upset. She believes that the cake Division project has an internal rate of return at least 15 percentage points higher than the donut Divisions project. She comments: What is the point of all our detailed DCF analysis? If Haslam wants a project, he can arrange to have the proponents of that project massage the numbers so that it looks like a winner.

A) What advice would you give the manager of the cake Division? (10 marks).

B) What is the essence of the discounted cash flow methods? (8 marks)