Problem 1. (25 marks)

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 cash flows each year for three years. Calculate the NPV for the project if the cost of capital is 15%. Would you invest in this new project?

Problem 2. (25 marks)

A firm with a WACC of 10% is considering the following mutually exclusive projects:

Which project would you recommend? Explain.

Problem 3. (25 marks)

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

The companys WACC is 8.5%. What is the IRR of the better project if they are mutually exclusive? (Hint: The better project may or may not be the one with the higher IRR.)

0 1 3 4. 2. + $75 $250 3 + $75 $125 5 H $190 $125 Project 1 Project 2 - $200 - $650 $75 $250 $190 $125 0 1 2 3 3 4 Projects Project L - $1,000 - $1,000 $870 $0 $250 $250 $25 $400 $25 $845