You are CFO of Explorers International, Incorporated. You have meetings with three of your direct reports, each of whom has an idea to discuss with you.

a. The first employee you meet with argues to continue with a project that is slated to be dropped because he says there has already been $1 million spent on research and development and the money borrowed to fund the R&D carries a 6% interest charge. He wants to continue with the project so those cash flows can be recovered. What will you tell him?

b. In your second meeting, this employee proposes a new capital budgeting project. Based on all her information, you agree the project has a positive NPV and an IRR that is greater than the firms weighted average cost of capital. However, you recommend that the project NOT be accepted. Discuss at least three reasons why you could come to the conclusion that rejecting the project is the right course of action.

c. The third employee shows you some metrics on three mutually exclusive projects under consideration:

IRR PI Project Red 17%. 1.3

Project Blue 21% 1.4

Project Yellow 18% 1.2

The firm has sufficient capital to fund whichever project is chosen. He is inclined to choose Project Blue based on the Internal Rate of Return (IRR) and the Profitability Index (PI) calculations but asks for your advice. What will you tell him? (4 points)