Question 1 (10 marks)

You have to pick between three mutually exclusive projects with the following cash flows to the firm:

Year Project A Project B Project C

0 -$15 000 $7 500 -$22 500

1 $12 000 $7 500 $15 000

2 $10 500 -$12 000 $12 000

The cost of capital is 10%.

a. Which project would you pick using the NPV rule? (4 marks)

b. Which project would you pick using the IRR rule? (4 marks)

c. How would you explain the differences between the two rules? Which one would you rely on to make your choice? (2 marks)