1. Use the following information for parts a, b, and c below. For all 3 projects, the marginal cost of capital is 10%. These questions require short, to-the-point answers. I am interested in seeing if you know the most appropriate criterion to look for in each case. Also, make sure you answer all questions in each section.

NPV

Project IRR at 10%

A 17% $1,250

B 21% 1,100

C 18% 1,125

a. Assume all 3 projects (A, B, and C) are independent projects and have average risk for projects of this firm. Also assume there is no capital rationing. Which project (or projects) should the firm accept? Does it matter whether the financial manager uses NPV or IRR in this case? Explain briefly. (3 pts)

b. Assume now that the 3 projects are mutually exclusive projects of average risk. The initial costs and expected lives of the projects are identical. No capital rationing exists. State which project (or projects) should be selected and which specific criterion is appropriate for your decision in this case. (3 pts)

c. Assume again that the 3 projects are independent projects, but the firm now faces severe capital rationing and can choose only one project. Which project should they select? Which criterion is appropriate in this case? Will there be an opportunity cost to the stockholders in this case? If so, how much? (4 pts)