Problem 2 Part A As a graduate accountant, you are asked by your manager to evaluate two investment projects. Both projects concern the purchase of new machinery. The follow data are available for each project. A ($) B ($) 75,000 Cost of machine 100,000 Expected profit before depreciation & tax Year 1 50,000 25,000 Year 2 50,000 35,000 Year 3 30,000 35,000 Year 4 20,000 35,000 2 Estimated residual value at 20,000 15,000 the end of Year 4 Assume the required rate of return for both projects are 10%, and straight-line depreciation is used. The company tax rate is 30%. a. Calculate Accounting Rate of Return for both projects b. Calculate the payback period for both projects Part B As the investment manager, you are evaluating two mutually exclusive projects. Both projects require the same initial investment of $20 million. The first investment will generate $4 million per year in perpetuity. The second investment will generate $3 million at the end of the first year and its revenues will grow at 3% per year thereafter. The cash flows of both projects start at the end of the first year. a. Calculate the IRRs for both projects? b. Calculate the NPVs for both projects, assume the cost of capital is 6%? c. Given your answer to a) and b), which project should you choose and why