QUESTION 7. (32 marks)

"Millie's Ice Cream" Company Limited has two (2) projects under consideration. The cash flows for each project are shown in the following table. The firm will be using a bank loan that has an annual interest of 12% to finance this project.

Initial Investment (CF0)	Project A	Project B
$200,000	$200,000
Year	Cash Inflows (CFt)
1	$45,000	$80,000
2	$45,000	$70,000
3	$45,000	$55,000
4	$45,000	$45,000
5	$45,000	$30,000

a. Calculate each project's net present value (NPV). Which project is preferred according

to this method?(9 marks)

b. Calculate each project's payback period.Which project is preferred according to this method?(5 marks)

c. Given the net present vales (NPVs) calculated in part a, which project will have a

greater Internal Rate of Return (IRR)? Please provide a brief explanation for your

response.(3 marks)

d. Define capital budgeting and identify the various steps in the capital budgeting process(4 marks)

e. Distinguish between the following concepts

a. Sunk costs and Opportunity Costs(2 marks)

b. Capital Expenditure and Operating Expenditure(3 marks)

c. Independent Project and Mutually Exclusive Project(2 marks)

d. Unlimited Funds and Capital Rationing(2 marks)

e. Accept-Reject Approaches and Ranking Approach(2 marks)