1. ProjectAandBare both available to BetaGo. The initial costs areC_0A= 100 andC_0B= 300 forAandB, respectively. ProjectAalone will generate a cash flow C_2A= 242 att2, and projectBalone will generate a cash flowC_2B= 484 att2. ButAandBare not independent. Indeed, if BetaGo invests in bothAandB, it can receive an extra 121 cash flow (the positive externality) att2. The rate of return is 10%.

(a)If BetaGo can invest in eitherAorB, which one will BetaGo choose? [Hint: if the NPVs of these two projects are same, BetaGo will choose either one.]

(b)If BetaGo can invest in bothAandB, will BetaGo invest in both projects?

Suppose that the manager of BetaGo has limited attention. Hence, if she invests inA andBat the same time, she cannot perform a good job. In particular, if she invests in both AandBatt0,C_2Abecomes 181.5, andC_2Bbecomes 363. (The positive externality will still be generated.)

1. (c) What is the optimal project choices now?