You have recently been hired as a financial analyst in the budget division of a large

corporation, HT Systems, which currently manufactures and sells components for home

theatre systems. The firm is interested in entering the cable service business. The firm

has selected two potential projects that will allow it to make an initial foray into this

business. The company plans to finance the project with the same D$/$E ratio the

company already has. Cost of debt is expected to be equivalent to average financing

cost for the sector.

Your first task is to complete the project evaluation on the following two mutually

exclusive projects.

a$.$ Use IRR and NPV to rank the projects.

Project incremental cash flows:

Yr$.01234$

A $-2,5009008008001,200$

B $-2,5001,2001,200500500$

HT Systems Cable Service Firm Averages

Beta D$/$E BTrd Beta D$/$E BTrd

$1\mathrm{.}535\%8\%1\mathrm{.}725\%7\mathrm{.}5\%$

Risk$-$free rate $=4\mathrm{.}5\%,$ market risk premium $=4\mathrm{.}8\%,$ tax rate $=35\%$