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Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B

Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B involves purchasing a VLCC (very large crude carriers) tanker to be deployed to the Middle East. The estimated cash flows from the projects are as follows (in $ million):

Year

0

1

IRR

NPV (@10%)

Project A

-10

20

Project B

-20

35

1. Calculate the Internal Rate of Return (IRR) and Net Present Value (NPV) of projects A and B. Assume that the risk-adjusted discount rate is 10%.

2. Based on the IRR rule, which project is preferred? How about based on the NPV rule?

3. Petrobras experienced a severe problem financing its investment projects after the recent decline in oil price. Assuming that the firm had secured only $20m of capital to invest, which project should Petrobras choose? Why?

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