1. Please complete the Mini Case located in "Ch 10: The Basics of Capital Budgeting" and provide your response to the following questions.

1. What is capital budgeting?
2. What is the difference between independent and mutually exclusive projects?
   1. Define the term net present value (NPV). What is each franchises NPV?
   2. What is the rationale behind the NPV method? According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive?
   3. Would the NPVs change if the cost of capital changed?
3. Define the term internal rate of return (IRR). What is each franchises IRR?
   1. How is the IRR on a project related to the YTM on a bond?
   2. What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive?
   3. Would the franchises IRRs change if the cost of capital changed?
4. Draw NPV profiles for Franchises L and S. At what discount rate do the profiles cross?
5. Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?
6. What is the underlying cause of ranking conflicts between NPV and IRR?

'PL Group is a holding company that owns Florida Power \& Light, electric generating plants across the country, the nation's largest fleet of wind turbines, and major solar power facilities. It takes up to 10 years to acquire property, obtain the necessary permits, design the plant, arrange the financing, and complete the construction of a large generating plant. Moreover, utilities like FPL are required by law to have electricity available when it is demanded-when people turn on the switch, the utility must have the energy its customers expect or suffer severe fines and other penalties. Thus, FPL must forecast power usage many years in advance and make plans for meeting that demand. Making a 10-year forecast is always difficult, but the 2008-2009 recession increased this difficulty tremendously. The two most important sectors of Florida's economy are housing and tourism. In 2009 the state had a huge supply of unsold houses and was second only to California in foreclosures, which was driving home prices down and vacancies up. Also, the bad economy was hurting the tourism industry. No one could know when those two industries-and the retail businesses that depend on them-would start to improve. That means no one could accurately forecast electricity usage or, thus, the need for new generating capacity. Before the economy started downhill, FPL had developed a detailed capital budget for 2009-2011. But as the economy began to decline, its managers had many long, hard meetings to consider modifications. On the one hand, FPL's managers wanted to keep construction on track-it's costly to start and stop large projects because large cancellation fees are imposed if contracts are canceled. Moreover, FPL wanted to move ahead with its wind and solar programs and thus provide more "green" energy. On the other hand, the capital markets were drying up, making it difficult and expensive to acquire the funds FPL needed to finance its capital budget. Even worse, if it charged ahead and completed plants for which there was no demand, then it was possible that interest, depreciation, and maintenance costs could literally drive the company to bankruptcy. In the end, management compromised-they cut back on the projects that were easiest to defer but went ahead with those for which deferrals would be most costly. The 2009 capital budget was reduced from $7.0 billion to $5.3 billion. Of the $1.7 billion reduction, $1.3 billion was related to wind farms, solar, and other "green" projects. FPL's actions, and similar ones by other utilities across the country, have had effects on the manufacturers of windmills, solar panels, and related products. Those firms have laid off workers, cut back R&D, and in some cases simply gone out of business. The FPL story is typical, and it illustrates that capital budgeting is critically important both to companies and to the economy. The principles set forth in this chapter will help you make the right choices regarding which projects to accept and which to reject