Tinky Winky Inc. considers two investment projects over the period of 6 years.

The first investment is to build a Tubbytronic Supertower. The initial investment is $220 million. The projected annual cash flows are as follows: $500million, $83.5million, $152.4million, $110.2million, $99.3million and $72.5 million.

The second investment is to produce a series of singing vacuum cleaners. The initial investment is $350 million. The projected annual cash flows from this investment are estimated to be $87.3million, $92.5 million, $76.2 million, $100.1 million, $110 million and $75.5 million

1. Tinky Winky Inc. has a market capitalization of $210 million and $69 million in debt. Based on the companys current credit position and market scenario, the cost of equity is assumed to be 11% while debt cost of capital is 8%. Assuming a tax rate of 25%, calculate the after-tax weighted average cost of capital (WACC). (6 marks)

2. Using the discount rate calculated in (a), what is the NPV for both investments? (18 marks)

3. Based on (b), which project will you choose? Briefly explain your decision. (4 marks)

4. Briefly explain why should companies invest in positive NPV projects? (2 marks)