Question B1 (17 marks) A) Elton Corporation is considering two independent projects. Both projects have the same initial cost and will last for 4 years. The expected cash inflows for both projects are as follows: Year Project A (S) Project B (S) 1 36,000 30,000 2 38,000 39,000 3 42,000 44,000 4 39,000 49,000 i) Project A has a required return of 15 percent while project B has a required return of 18 percent. The company has computed the profitability index (PI) of project A to be 1.1. What should be the investment decision of Elton Corporation relating to these two projects? (5 marks) ii) Explain your investment decision in (1). (3 marks) 2 B) Repulse Bay Corporation is trying to choose between two mutually exclusive projects. Project A has a 5 year expected life while project B has a 4 year expected life. The after tax cash flows of both projects are as follow: Year Project A (S) Project B (S) 0 -120,000 -90,000 1 35.000 45.000 42,000 37,000 3 48,000 28,000 4 40,000 25.000 36,000 Assume that both projects can be repeated and that there are no anticipated changes in the cash flows. Repulse Bay Corporation required a return of 17 percent for both investments 1) Using the equivalent annual annuity (EAA) approach, which project should the company choose? (5 marks) ii) Explain why we can make our investment decision in (i) using the equivalent annual annuity (EAA) approach (4 marks)