You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.1 million. Investment A will generate $1.89 million per year(starting at the end of the firstyear) in perpetuity. Investment B will generate $ 1.52 million at the end of the firstyear, and its revenues will grow at 2.5 %per year for every year after that.

a. Which investment has the higherIRR?

b. Which investment has the higher NPV when the cost of capital is

6.9 %?

c. In thiscase, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the bestopportunity?

Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $ 22 million upfront investment and will generate $ 20 million in savings for Facebook each year for the next 33 years. The second bid from Cisco requires a $ 85 million upfront investment and will generate $ 60 million in savings each year for the next 33 years.

a. What is the IRR for Facebook associated with eachbid?

b. If the cost of capital for each investment is 20%, what is the net present value (NPV) for Facebook of eachbid?

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of thelease, Facebook will pay $28 millionupfront, and $35 million per year for the next 33 years.Facebook's savings will be the same as withCisco's original bid.

c. Including itssavings, what areFacebook's net cash flow under the leasecontract? What is the IRR of the Cisco bidnow?

d. Is this new bid a better deal for Facebook thanCisco's originalbid? Explain

A bicycle manufacturer currently produces 242,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $1.90 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Directin-house production costs are estimated to be only $1.60 per chain. The necessary machinery would cost $244,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using aten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $52,000 of inventory and other working capital upfront(year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $18,300. If the company pays tax at a rate of 35 %and the opportunity cost of capital is 15 %what is the net present value of the decision to produce the chainsin-house instead of purchasing them from thesupplier.