You are considering a project in United Kingdom (A) and a project in Norway (B) and the two projects have the following cash flows (in million USD):

a) Both projects are believed to be risk-free. Calculate the net present values (NPV) for the two projects using a risk free discount rate of 5%. If you have access to sufficient capital, should both projects be executed? Which project would you prefer if it is only possible to finance one of the projects?

b) New information about project A reveals that it is risky. A discount rate of 15% is proposed by an investment expert. What is the risk term of the new discount rate? Recalculate the NPV of project A. Should both projects be executed if you have sufficient capital? What is the preferred project?

c) What is the internal rate of return (IRR) of the two projects? Should the IRR be compared directly for these two projects?

Year Project A Project B 0 -2 000 -2000 1 500 1000 2 1 000 1000 3 1 500 1000 4 2 000 1000 5 2 500 1 000