You are given with the following information of two projects planned by your company. The initial costs are given as: $3 million for project A, and $2.5 million for project B, respectively.

Table 1: (in thousands)

Project Year 1 Year 2 Year3 Year 4 Year 5

A -450 1250 -350 2200 2800

B 360 852 400 975 2250

Answer the following questions.

a) Suppose the cost of capital is 15%. What are the Net Present Values for these two projects?

b) Suppose the financial manager discovered that if we postponed the project B to two years later, the cost of capital could be 10% due to possible low future interest rates. However, the deferment may cost the firm additional $0.5 million to restart the facilities and the initial cost must be spent now, instead of two years later. Will you recommend waiting for additional 2 years to start?

c) Let the corporate income tax rate be 30%, the cost of debts be 6%, the cost of equity be 25% and there is no preferred stock issued by the firm. What is the debt-to-equity ratio for your company?

d) Find the IRR (Internal Rate of Return) for project A and project B.

e) Suppose that the cost of capital may be reduced from 15% to 10% if the firm deferred the project until one year later. What is the marginal advantage or disadvantage (in terms of the today's NPV) should the firm decide to do so on each project?