Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of P100,000 and has an expected life of 2 years. Project X has after-tax cash inflows of P65,000, P42,000, P20,000 and P22,500 at the end of Years 1, 2, 3 and 4, respectively. Project Y has after-tax cash inflows of P40,600 at the end of each of the next 4 years. Using WACC of 11%, the two projects have conflicting ranking under IRR and NPV techniques. The certainty equivalent factors for each year are as follows: Year 1- 93%; Year 2- 86%; Year 3- 75%; Year 4- 60%.

1. Compute for the crossover rate of the two projects. Indicate your final answer in decimal form with 4 decimal places (e.g. 10.11% should be entered as 0.1011)

2. Compute for project Xs NPV under certainty equivalents if risk-free rate is 4%.

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NExt questions

Homes Pizzas, Inc., operates pizza shops in several cities. One of the companys most profitable shop is located near a renowned University in Manila. A small bakery next to the shop has just gone out of business, and Homes Pizzas has an opportunity to lease the vacated space. The lessor offered 2 types of lease contract:

Lease contract A: A P600,000 per year under a 5-year non-cancellable lease contract.

Lease contract B: A P650,000 per year under a 5-year lease cancellable after one year.

Homes management plans to take out the wall between the pizza shop and the vacant space and expanding the pizza outlet. The pizza shop in this location is currently selling 40,000 pizzas per year. If the countrys economy continues to recover from the COVID-19 pandemic, management is confident that sales could be increased by 40%; hence, should select lease contract A. However, economic outlook of the country shows that there is a 25% chance it would go into a recession after a year, in this case Home would be better-off to discontinue the expansion by selecting lease contract B.

Management estimates the following after-tax incremental cash flows under the two economic situations for each of the lease contracts:

	Cash inflow (outflow)-Lease A		Cash inflow (outflow)-Lease B
Year	Economic recovery	Economic recession	Economic recovery	Economic recession
0	(1,197,500)	(1,197,500)	(1,197,500)	(1,197,500)
1	574,000	574,000	534,000	534,000
2	574,000	(196,400)	534,000	104,500
3	574,000	(196,400)	534,000
4	574,000	(196,400)	534,000
5	646,500	(126,500)	606,500

3. Calculate the expected net present value (NPV) under each contract using a cost of capital of 12%. Indicate the expected NPV of the contract that Home Pizza should select. A succeeding question is related to this question, kindly take note of your answer before proceeding to the next question.

4. How much is the value of the abandonment option under contract B?