Section 8: Capital Budgeting Suppose your company is considering two projects (Project A & Project B)

Company: Microsoft

Project A: This project is the introduction of a new product. It will require an upfront investment of 10 million dollars. At the end of year 1, the project will generate 2.5 million dollars in FCFs. At the end of year 2, the project will generate 2.6 million dollars in FCFs. At the end of year 3, the project will generate 2.7 million dollars in FCFs. At the end of year 4, the project will generate 2.8 million dollars in FCFs. At the end of year 5, the project will generate 3.0 million dollars in FCFs. The project will generate no more FCFs after year 5. Project B: This is an expansion of the company's main office. This project will require an upfront investment of 4.5 million dollars. In year 1, the expansion will generate 0.5 million dollars in. After the first year, FCFs will grow by 2% each year forever. 34. Calculate the IRR of each project. 35. Calculate the NPV of each project 36. Calculate the Payback Period of each project. 37. Suppose the two projects are independent. Which (if any) should the company accept? Why? 38. Suppose instead the two projects are mutually exclusive, and the company can only accept one project. Which project should the company accept why?

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