Project A has a cost of $10,000 and is expected to produce cash flows of $3,000 per year

for five years. Project B has a cost of $25,000 and is expected to produce cash flows of

$7,400 per year for five years. The appropriate discount rate is 12%.

1. Calculate the NPV, IRR, and profitability index (PI) of both projects.

2. Assuming that the projects are mutually exclusive, which project would you select based

on NPV, IRR, and PI?

3. Calculate the IRR and PI of the incremental cash flow to justify the choice of optimal

project.