Question 2

Mastermind Investments is a sovereign wealth fund focused on investing in renewable energy projects. The firm uses an 8.50% discount rate for its investments. Recently Mastermind Investments has two potential projects on hand, code-named Project Sol and Project Ventus. The estimated future after-tax cash flows of the two projects are shown in Table 2.1. Mastermind Investments is now deciding which one it should invest in.

Table 2.1

	After Tax Cash flow($)	After Tax Cash flow($)
Year	Project Sol	Project Ventus
0	-5,000,000	-5,000,000
1	900,000	1,200,000
2	900,000	1,600,000
3	900,000	2,000,000
4	1,200,000
5	1,200,000
6	800,000
7	800,000
8	800,000

Answer the following questions:

a If Mastermind Investments uses the net present value (NPV) method, which project would it choose?

b Would the decision be the same if the equivalent annual annuity (EAA) method was used? Show your calculation.

c Based on your answers to parts (a) and (b), what problem has the company encountered in selecting mutually exclusive projects? Which project should Mastermind Investments choose?